uncertainty investment and industry evolution we study the effects of aggregate and idiosyncratic uncertainty on the entry of firms total investment and prices in a competitive industry with irreversible investment we first use standard dynamic programming methods to determine firms entry decisions and we describe the resulting industry equilibrium and its characteristics emphasizing the effects of different sources of uncertainty we then show how the conditional distribution of prices can be used as an alternative means of determining and understanding the behavior of firms and the resulting industry equilibrium finally we use four digit u s manufacturing data to examine some implications of the model

green accounting for an externality pollution at a mine this paper takes a value added approach to green accounting at an individual microeconomic unit a mine capacities forextraction and for abatement of pollution are chosen subject to anenvironmental regulation the implications for accounting for resource andenvironmental degradation are discussed depreciation is not quantitativelyunique but can be compared qualitatively with a condition involving shadowprices the costs of defensive expenditures contribute to increasing greennnp but depreciation of the resource is a charge against gnp in computinggreen nnp income from capital is the return on the undepreciated values ofextractive capacity abatement capacity and the resource and is a part ofnet domestic income

real option valuation of power transmission investments by stochastic simulation abstract network expansions in power markets usually lead to investment decisions subject to substantial irreversibility and uncertainty hence investors need valuing the flexibility to change decisions as uncertainty unfolds progressively real option analysis is an advanced valuation technique that enables planners to take advantage of market opportunities while preventing or mitigating losses if future conditions evolve unfavorably in the past many approaches for valuing real options have been developed however applying these methods to value transmission projects is often inappropriate as revenue cash flows are path dependent and affected by a myriad of uncertain variables in this work a valuation technique based on stochastic simulation and recursive dynamic programming called least square monte carlo is applied to properly value the deferral option in a transmission investment the effect of option s maturity the initial outlay and the capital cost upon the value of the postponement option is investigated finally sensitivity analysis determines optimal decision regions to execute postpone or reject the investment projects

irreversible investment with regime shifts under the real options approach to investment under uncertainty agents formulate optimal policies under the assumption that firms growth prospects do not vary over time this paper proposes and solves a model of investment decisions in which the growth rate and volatility of the decision variable shift between different states at random times a value maximizing investment policy is derived such that in each regime the firm s investment policy is optimal and recognizes the possibility of a regime shift under this policy investment is intermittent and increases with marginal q moreover investment typically is very small but in some states the capital stock jumps implications for marginal q and the user cost of capital are also examined

testing the option value theory of irreversible investment this article statistically tests the option theory of irreversible investment using contingent claims valuation we derive the value of options to invest in capacity where the projects are endogenous to the economic circumstances prevailing at the investment date we then test whether decisions made by canadian copper mines are compatible with the trigger price implied by the theory our model explains investment size and timing satisfactorily from a statistical and an economic point of view simulations with a mean reverting process suggest that the results do not depend crucially on the assumption that price follows a geometric brownian motion

50th anniversary article option pricing valuation models and applications this paper surveys the literature on option pricing from its origins to the present an extensive review of valuation methods for european and american style claims is provided applications to complex securities and numerical methods are surveyed emphasis is placed on recent trends and developments in methodology and modeling

review of environmental efficiency and its influencing factors in china 1998 2009 abstract improving environmental efficiency has been regarded as an objective requirement and an inevitable path to build a resource saving and environment friendly society in china the slacks based measurement sbm model with undesirable output is applied to measure the environmental efficiency of provinces in china from 1998 to 2009 then by the tobit model we can empirically test the impact of influencing factors on the environmental efficiency it demonstrates the low value of the environmental efficiency of each province with an essentially descending trend on the whole and the distinct differences between the environmental efficiency of those provinces besides gdp per capita dependent on foreign capital and trade environmental awareness and population density have obviously positive impacts on environmental efficiency and the proportion of the secondary industry in the gdp shows a significantly negative impact on the environmental efficiency

intertemporal emission permits trading under uncertainty and irreversibility this paper analyzes the effect of emission permit banking on clean technology investment and abatement under conditions where the stringency of the future cap is uncertain we examine the problem of heterogeneous firms minimizing the cost of intertemporal emission control in the presence of stochastic future pollution standards and emission permits that are tradable across firms and through time a firm can invest in clean capital an improved pollution abatement technology to reduce its abatement cost we consider two possibilities that investment is reversible or irreversible uncertainty is captured within a two period model only the current period cap is known we show that if banking is positive and marginal abatement costs are sufficiently convex there will be more abatement and investment in clean technology under uncertainty than there would be under certainty and no banking these results are at odds with the common belief that uncertainty on future environmental policy is a barrier to investment in clean capital moreover under uncertainty and irreversibility we find that there are cases where banking enables firms to invest more in clean capital

the inflation output trade off with downward wage rigidities the macroeconomic implications of downward nominal wage rigidi ties are analyzed via a dynamic stochastic general equilibrium model featuring aggregate and idiosyncratic shocks a closed form solution for a long run phillips curve relates average output gap to average wage inflation it is virtually vertical at high inflation and flattens at low inflation macroeconomic volatility shifts the curve outwards and reduces output the results imply that stabilization policies play an important role and that optimal inflation may be positive and dif fer across countries with different macroeconomic volatility results are robust to relaxing the wage constraint for example when large idiosyncratic shocks arise jel e23 e24 e31 e63

optimal fishery management with regime shifts an assessment of harvesting strategies this paper compares outcomes from informed and uninformed harvesting strategies for a fish stock with switching dynamics where the probability of switching is influenced by climate using data on sea surface temperature anomalies the impacts of climate on the conservation and the welfare that can be extracted from the stock are investigated results indicate that an informed management policy leads to stock biomass and resource rents that are up to 2 7 and 2 times higher respectively than under an uninformed policy also the fishery is open 54 longer under the informed policy the magnitude of these effects depends on the choice of the discount rate indicating that when the future is highly discounted gains from the informed policy dissipate

valuation of commodity based swing options in the energy markets in particular the electricity and natural gas markets many contracts incorporate flexibility of delivery options known as swing or take or pay options subject to daily as well as periodic constraints these contracts permit the option holder to repeatedly exercise the right to receive greater or smaller amounts of energy we extract market information from forward prices and volatilities and build a pricing framework for swing options based on a one factor mean reverting stochastic process for energy prices that explicitly incorporates seasonal effects we present a numerical scheme for the valuation of swing options calibrated for the case of natural gas

corporate control and real investment in incomplete markets abstract in the standard real options approach to investment under uncertainty agents formulate optimal policies under the assumptions of risk neutrality or perfect capital markets however in most situations corporate executives face incomplete markets either because they receive compensation packages that restrict their portfolios or because cash flows from the firm s investment opportunities are not spanned by those of existing assets the present paper examines the impact of managerial risk aversion on investment decisions when the manager is exposed to idiosyncratic risk and faces the risk of a control challenge in the paper the investment policy selected by the manager reflects a trade off between his incentives to reduce risk and the need to ensure sufficient efficiency to prevent control challenges the analysis demonstrates that risk aversion induces the manager to speed up investment leading to a significant erosion of the value of the option to wait

effects of productivity total domestic product demand and incentive wages on unemployment in a non monetary customer market model of the small open economy a small open economy is studied where the labor market exhibits job rationing owing to the elevated wage induced by the shirking problem with the world product market neoclassical a bad national productivity shock reduces employment and the real wage even in the short run a demand shock is undefined for a country too small to affect price nonnegligibly with the world a customer market employment may rise with the domestic productivity shock before it falls increased foreign demand raises both employment and the relative world price but it does not follow that a general increase of demand raises world employment

why do households without children support local public schools linking house price capitalization to school spending while residents receive similar benefits from many local government programs only about one third of all households have children in public schools we argue that capitalization of school spending into house prices can encourage even childless residents to support spending on schools we identify a proxy for the extent of capitalization the supply of land available for new development and show that towns in massachusetts with little undeveloped land have larger changes in house prices in response to a plausibly exogenous spending shock towns with little available land also spend more on schools we extend these results using data from school districts in 46 states showing that per pupil spending is positively related to the percentage of developed land this positive correlation persists only in districts where the median resident is a homeowner and is stronger in districts with more elderly residents who do not use school services and have a shorter expected duration in their home our findings support models in which capitalization encourages the provision of durable local public goods and provides an additional reason why some elderly support local school spending

measuring ecological efficiency with data envelopment analysis dea abstract the measurement of ecological efficiency provides some important information for the companies environmental management ecological efficiency is usually measured by comparing environmental performance indicators data envelopment analysis dea shows a high potential to support such comparisons as no explicit weights are needed to aggregate the indicators in general dea assumes that inputs and outputs are goods but from an ecological perspective also bads have to be considered in the literature bads are treated in different and sometimes arbitrarily chosen ways this article aims at the systematic derivation of ecologically extended dea models starting from the assumptions of dea in production theory and activity analysis a generalisation of basic dea models is derived by incorporating a multi dimensional value function f extended preference structures can be considered by different specifications of f e g specifications for ecologically motivated applications of dea

leaders followers and equity risk premiums in booms and busts abstract we study an investment problem in which two asymmetric firms face competition and the regime characterizing the economic condition follows a markov switching process we derive the value functions and investment thresholds of the leader and follower the option value of regime uncertainty is found to be quite important for the investment decision of firms we also show the relationship between the equity risk premium and the economic cycle that has not been done in previous studies which proxy economic conditions by the level of demand or other state variables

optimal capital structure and bankruptcy choice dynamic bargaining versus liquidation abstract we model a firm s optimal capital structure decision in a framework in which it may later choose to enter either chapter 11 reorganization or chapter 7 liquidation creditors anticipate equityholders ex post reorganization incentives and price them into the ex ante credit spreads using a realistic dynamic bargaining model of reorganization we show that the off equilibrium threat of costly renegotiation can lead to lower leverage even with liquidation in equilibrium if reorganization is less efficient than liquidation the added option of reorganization can actually make equityholders worse off ex ante even when they liquidate on the equilibrium path

an equilibrium model of investment under uncertainty this paper analyzes the optimal investment decisions of heterogeneous rms in a competitive uncertain environment we characterize rms optimal investment strategy explicitly and derive a closed form solution for rm value we show that in the strategic equilibrium real option premia are signi cant as a result rms delay investment choosing optimally not to undertake some positive npv projects the model predicts that rm returns vary over the business cycle with returns negatively skewed during expansions but positively skewed in recessions

option premiums in mineral asset pricing are they important mineral assets consistently trade at market values greater than their discounted cash flow dcf values one explanation is that dcf analysis does not and cannot incorporate the asset value generated by asset management under uncertainty this paper surveys the attempts to empirically quantify the option premium associated with optimal mineral asset management the option premium appears to explain at most half of the observed gap between dcf value and market value and adds at most 3 percent to a mineral asset s gross worth asset management option premiums therefore have only a second order impact on mineral asset pricing

a real option model for renewable energy policy evaluation with application to solar pv power generation in china abstract this study proposes a policy evaluation model from the perspective of government and investors the proposed model which integrates american option method and two factor learning curve method can be used to evaluate the unit decision value and save path rate for renewable energy development and examine the existence of balance point of interest several uncertain factors including non renewable energy cost carbon price renewable energy cost and price subsidy are all considered in this model the model has been applied to evaluate the solar photovoltaic pv power generation in china our empirical results show that real option analysis roa is more effective than net present value analysis npv when handling uncertainty under current level of subsidy the government would suffer loss and the investors could benefit so that it is difficult to achieve the balance of interest during the planning period with the reduction of subsidy rate they can achieve the balance of interest

regime uncertainty and optimal investment timing abstract we construct a real options model in which a regime change is expected at a pre determined future time and study the effects of regime uncertainty on a firm s strategic investment decision taking into consideration the remaining time to the regime change and the probability of each regime state we show that just before the time of a regime change firms should act as if the worst case scenario was about to happen even if a good state is highly possible

oil futures prices in a production economy with investment constraints we document a new stylized fact that the relationship between the volatility of oil futures prices and the slope of the forward curve is nonmonotone and has a v shape this pattern cannot be generated by standard models that emphasize storage we develop an equilibrium model of oil production in which investment is irreversible and capacity constrained investment constraints affect firms investment decisions and imply that the supply elasticity changes over time since demand shocks must be absorbed by changes in prices or changes in supply time varying supply elasticity results in time varying volatility of futures prices estimating this model we show it is quantitatively consistent with the v shape relationship between the volatility of futures prices and the slope of the forward curve in recent years commodity markets have experienced dramatic growth in trad

a real options model for renewable energy investment with application to solar photovoltaic power generation in china this paper proposes a real options model for evaluating renewable energy investment by considering uncertain factors such as co2 price non renewable energy cost investment cost and market price of electricity a phase out mechanism is built into the model to reflect the long term changes of subsidy policy we apply the proposed model to empirically evaluate the investment value and optimal timing for solar photovoltaic power generation in china our empirical results show that the current investment environment in china may not be able to attract immediate investment while the development of carbon market helps advance the optimal investment time a sensitivity analysis is conducted to investigate the dynamics of investment value and optimal timing under the changes of unit generating capacity subsidy level market price of electricity co2 price and investment cost it is found that the high investment cost and the volatility of electricity and co2 prices are not conducive to attract immediate investment instead increasing the level of subsidy promoting technological progress and maintaining the stability of market are useful to stimulate investment

a continuous time equilibrium model of forward prices and futures prices in a multigood economy abstract this paper is a theoretical investigation of equilibrium forward and futures prices we construct a rational expectations model in continuous time of a multigood identical consumer economy with constant stochastic returns to scale production using this model we find three main results first we find formulas for equilibrium forward futures discount bond commodity bond and commodity option prices second we show that a futures price is actually a forward price for the delivery of a random number of units of a good the random number is the return earned from continuous reinvestment in instantaneously riskless bonds until maturity of the futures contract third we find and interpret conditions under which normal backwardation or contango is found in forward or futures prices these conditions reflect the usefulness of forward and futures contracts as consumption hedges

short term variations and long term dynamics in commodity prices in this article we develop a two factor model of commodity prices that allows meanreversion in short term prices and uncertainty in the equilibrium level to which prices revert although these two factors are not directly observable they may be estimated from spot and futures prices intuitively movements in prices for long maturity futures contracts provide information about the equilibrium price level and differences between the prices for the short and long term contracts provide information about short term variations in prices we show that although this model does not explicitly consider changes in convenience yields over time this short term long term model is equivalent to the stochastic convenience yield model developed in gibson and schwartz 1990 we estimate the parameters of the model using prices for oil futures contracts and apply the model to some hypothetical oil linked assets to demonstrate its use and some of its advantages over the gibson schwartz model

a dynamic model of cleanup estimating sunk costs in oil and gas production the environmental remediation required to permanently decommission most industrial projects is an expensive irreversible investment real options literature shows that temporary closure has value under uncertainty however even if there is no intention to restart operations there is an incentive to label a closure as temporary to avoid having to remediate ongoing or future environmental externalities i estimate a dynamic discrete choice model of closure under price and quantity uncertainty to evaluate the likelihood of reactivation the model reveals that the option to temporarily close is being widely used to avoid environmental remediation of oil and gas wells in canada

undesirable outputs in efficiency valuations abstract efficiency measurement is usually based on the assumption that inputs have to be minimized and outputs have to be maximized in a growing number of applications however undesirable outputs are incorporated into the production model which have to be minimized in this paper various approaches for treating such outputs in the framework of data envelopment analysis dea are discussed and the resulting efficient frontiers are compared new radial measures are introduced which assume that any change of the output level will involve both undesirable and desirable outputs

modeling undesirable factors in efficiency evaluation abstract data envelopment analysis dea measures the relative efficiency of decision making units dmus with multiple performance factors which are grouped into outputs and inputs once the efficient frontier is determined inefficient dmus can improve their performance to reach the efficient frontier by either increasing their current output levels or decreasing their current input levels however both desirable good and undesirable bad factors may be present for example if inefficiency exists in production processes where final products are manufactured with a production of wastes and pollutants the outputs of wastes and pollutants are undesirable and should be reduced to improve the performance using the classification invariance property we show that the standard dea model can be used to improve the performance via increasing the desirable outputs and decreasing the undesirable outputs the method can also be applied to situations when some inputs need to be increased to improve the performance the linearity and convexity of dea are preserved through our proposal

a model of capacity choice under knightian uncertainty abstract this paper introduces knightian uncertainty into the standard model of capacity choice and investigates its impact on the firm s expansion decision first we find knightian uncertainty reduces both the firm value and marginal value of capital under knightian uncertainty the firm s expansion decision is shown to be more conservative when the firm value is decomposed into the value of assets in place and growth opportunities we find the value reduction caused by knightian uncertainty is much more substantial for the value of growth opportunities finally the implications of the user cost of capital and stationary distribution of firm value are also examined

risk aversion indivisible timing options and gambling in this paper we model the behavior of a risk averse agent who seeks to maximize expected utility and who has an indivisible asset and a timing option over when to sell this asset our main contribution is to show that contrary to intuition optimal behavior for such a risk averse agent can include risk increasing gambles for example a manager with a choice over when to disinvest from a project a private homeowner with a property to sell or an employee with a grant of american style stock options may be better off taking positions in other assets with zero sharpe ratio that are uncorrelated with the underlying project house or stock price risk the results have wider implications for the modeling and interpretation of portfolio optimization problems involving american style timing decisions

integration or segmentation of the canadian stock market evidence based on the apt the domestic and international arbitrage pricing theories are modified to encom pass the hypotheses that the canadian and global north american equity markets are com pletely or partly integrated segmented the exchange rate determination literature is used to identify potentially priced binational factors and the sensitivities and factor prices are es timated using non linear sur the two equity markets are only partly integrated segmented canadian stock returns are influenced by the pure domestic components of the term structure and lagged industrial production and by the pure international components of the differential

multilateral productivity comparisons when some outputs are undesirable a nonparametric approach multilateral productivity comparisons of firms producing multiple outputs some of which are undesirable are obtained by making two modifications to the standard farrell approach to efficiency measurement the restriction that production technology satisfy strong disposability of outputs is relaxed to allow for the fact that undesirable outputs may be freely disposable and the efficiency measures are modified to allow for an asymmetric treatment of desirable and undesirable outputs performance measures that satisfy these requirements are calculated as solutions to programming problems the methodology is applied to a sample of mills producing paper and pollutants

dynamic resource management under the risk of regime shifts abstract this paper provides a framework through which a dynamic resource management problem with potential regime shifts can be analyzed both in a strategic environment and from a social planner s perspective based on a fairly general model a condition for a precautionary policy is discussed by applying the framework to a common property resource problem with a linear production technology we illustrate how the qualitative as well as quantitative nature of equilibrium is altered due to the possibility of regime shifts in particular when the risk is endogenously affected by the players behavior potential regime shifts can facilitate the precautionary management of resources as long as the resource stock is in good shape as the stock of resource becomes scarce however the precautionary effect vanishes and more aggressive resource exploitation emerges the impacts of irreversibility on the equilibrium behavior are highlighted it is also shown that there can exist a resource depletion trap in which a regime shift once it happens triggers a continuous decline of resource stock no matter which regime materializes in the subsequent periods

how does income inequality affect energy efficiency empirical evidence from 33 belt and road initiative countries abstract at present income distribution and environmental pollution are serious issues faced by the belt and road initiative bri countries and exploring the impact of income inequality on energy efficiency is meaningful for the sustainability of bri countries using the panel data of 33 bri countries from 2000 to 2016 we first evaluate the energy efficiency of the countries by dynamic dea model and then adopt the tobit regression model to investigate the nonlinear effect of income inequality on energy efficiency the results suggest that first during 2000 2016 the overall energy efficiency of 33 bri countries is relatively low falling to 0 38 while the overall energy efficiency of high income bri countries is much higher than that of the middle and low income bri countries second the average energy efficiency of the bri countries has declined since year 2013 third there is an inverted u type effect of income inequality on energy efficiency in the whole sample but the impact of income inequality on energy efficiency is heterogeneous for countries at different income levels specifically in high income bri countries income inequality shows a u type effect on energy efficiency while in middle and low income bri countries the relationship between income inequality and energy efficiency is an inverted u type moreover economic growth positively impacts the energy efficiency while industrialization and energy structure negatively influence the energy efficiency

the determinant of production entry and exit model on financing behavior this study seeks for equity debt values and the relevant potential firm value with financing or not when the real options approach is assessed the paper deals with the following relative problems 1 the assessment rule of decision whether to stop production or not 2 whether the dis investment cost or salvage could reflect the production scale 3 whether the rate of capital cost or the rate of return in different stages could reflect the suitable risk premium 4 when the investment cost exit cost and salvage are the linear functions of production volume and follow the geometric brownian motion to analyze the optimum external financing behavior and to decide the production thresholds of production entry and exit

a bayesian approach to real options the case of distinguishing between temporary and permanent shocks traditional real options models demonstrate the importance of the option to wait due to uncertainty over future shocks to project cash flows however there is often another important source of uncertainty uncertainty over the permanence of past shocks adding bayesian uncertainty over the permanence of past shocks augments the traditional option to wait with an additional option to learn the implied investment behavior differs significantly from that in standard models for example investment may occur at a time of stable or decreasing cash flows respond sluggishly to cash flow shocks and depend on the timing of project cash flows during the past two decades the real options approach to valuation of irreversible investment opportunities has become part of the mainstream literature in financial economics the central idea is that the opportunity to invest is equivalent to an american call option on the underlying investment project as a consequence the problem of optimal investment timing is analogous to the optimal exercise decision for an american option applications of the real options approach are now numerous 1 one feature that is common to virtually all real options models is that the underlying uncertainty pertains only to future shocks since future cash flows are uncertain there is an important opportunity cost of investing today the value of the asset might go up so that tomorrow will be an even better time to invest this opportunity cost is often referred to in the literature as the option

optimal design of subsidy to stimulate renewable energy investments the case of china this paper proposes a real options model for estimating the optimal subsidy for renewable energy power generation project by using stochastic process to describe the market price of electricity co2 price and investment cost two indicators i e project value and threshold value are used to derive the optimal subsidy the least squares monte carlo simulation method is used to solve the model the proposed model is used to empirically evaluate the optimal level of subsidy for solar photovoltaic power generation in china the results show that carbon emission trading scheme helps reduce subsidy unit generating capacity market price of electricity co2 price and the volatility of investment cost are negatively related with subsidy whereas investment cost and the volatility of electricity price and co2 price are positively related with subsidy it is suggested that chinese governments take some measures e g promoting technological progress establishing a nationwide carbon emission trading market promoting the competition in renewable energy industry as well as maintaining the stability of co2 price and electricity price to reduce the required subsidy

explaining investment dynamics in u s manufacturing a generalized s s approach we are grateful to olivier blanchard whitney newey james stock an editor three anonymousreferees and seminar participants at brown cepr champoussin chicago columbia econometric society meetings caracas and tokyo efcc harvard impa lse nber princeton rochester site toronto u de chile and yale for their comments financial support to caballero from the national science and sloan foundations and to engel from fondecyt grant 195 510 and the mellon foundation grant 9608 is gratefully acknowledged 2since plants entry is excluded from their sample these statistics are likely to represent lowerbounds on the degree of lumpiness in plants investment patterns 3we use the word project to emphasize the fact that the actual implementation of a projectmay cover more than a year observation realistic time to build aspects of investment are not incontradiction with the view that investment episodes are lumpy in nature 4 see chirinko 1994 for a survey of the empirical investment literature

valuation of path dependent contingent claims with multiple exercise decisions over time the case of take or pay hull and white 1993 introduced a method to extend lattice based contingent claim val uation techniques to problems with path dependent payoffs this paper builds upon their method in the process of valuing two types of commodity purchase contracts that ex hibit a form of timing flexibility not previously analyzed in the literature the techniques demonstrated take advantage of characteristics of claims that simplify incorporation of path dependencies possible uses for the methods demonstrated include the valuation of port folios of mortgages capital projects where intensity of use affects productivity ofthe asset and capital projects with storage characteristics

finite project life and uncertainty effects on investment abstract this paper revisits the important result of the real options approach to investment under uncertainty which states that increased uncertainty raises the value of waiting and thus decelerates investment typically in this literature projects are assumed to be perpetual however in today s economy firms face a fast changing technology environment implying that investment projects are usually considered to have a finite life the present paper studies investment projects with finite project life and we find that in contrast with the existing theory investments may be accelerated by increased uncertainty it is shown that this particularly happens at low levels of uncertainty and when project life is short

patent protection market uncertainty and r d investment the real options investment theory shows that greater uncertainty about market revenues reduces current r d investment by increasing the value of waiting this paper presents empirical evidence that patent protection mitigates the effect market uncertainty on r d investment

low or no subsidy proposing a regional power grid based wind power feed in tariff benchmark price mechanism in china abstract the chinese government plans to adopt a low or no subsidy policy mechanism on renewable energy power development in the future to achieve a balance between reducing financial burden on the government and ensuring profitability of investors as well as to account for the regional differences in china a novel regional wind power grid feed in tariff benchmark price mechanism by net present value npv method and real option ro method is proposed in this paper the results voice support on the appropriateness of gradually decreasing the wind feed in tariff fit benchmark price to as low as the coal fired fit the proposed fit price level is presented as a price range on the basis of a guaranteed internal rate of return irr falls in between 8 to 15 for wind power investors the results indicate that the current fit price should be readjusted and redistributed although the fit price in central and south china grids is recommended to be relatively high the npv of wind farm project value in six regional grids are at the same level

option exercise games an application to the equilibrium investment strategies of firms under the standard real options approach to investment under uncertainty agents formulate optimal exercise strategies in isolation and ignore competitive interactions however in many real world asset markets exercise strategies cannot be determined separately but must be formed as part of a strategic equilibrium this article provides a tractable approach for deriving equilibrium investment strategies in a continuous time cournot nash framework the impact of competition on exercise strategies is dramatic for example while standard real options models emphasize that a valuable option to wait leads firms to invest only at large positive net present values the impact of competition drastically erodes the value of the option to wait and leads to investment at very near the zero net present value threshold copyright 2002 oxford university press

investment in competitive equilibrium the optimality of myopic behavior there is an extensive literature on the optimal irreversible investment strategy of a solitary firm facing an exogenous price process this paper shows that the investment strategies that this literature derives may be optimal in competitive equilibrium even though the price process is now endogenous this provides a simple means for computing equilibrium investment strategies

option valuation of claims on real assets the case of offshore petroleum leases this paper extends financial option theory by developing a methodology for the valuation of claims on a real asset an offshore petroleum lease several theoretical and practical problems not present in applying option pricing theory to financial assets are addressed most importantly we show the necessity of combining option pricing techniques with a model of equilibrium in the market for the underlying asset petroleum reserves the advantages of this approach over conventional discounted cash flow techniques are emphasized the methodological development provides important insights for both company behavior and government policy promising empirical results are reported

real wages aggregate demand and unemployment a new methodology for differentiating the effects of aggregate demand and real wage rigidity on unemployment is presented it departs from the standard fixprice model by specifying that 1 product markets are imperfectly competitive and 2 demand functions for labor and capital are conditional on output as well as on the real wage keynesian and classical unemployment may coexist instead of occupying separate regimes as in the rationing model with competitive firms the method is used to estimate the volumes of natural excess hidden demand gap and wage gap unemployment in the united states during 1959 1982

equilibrium and options on real assets in aggregate options on real and financial assets can have very different properties typically the good or service produced by a real asset has a finite elasticity of demand and developers have finite capacities also the supply of options can be limited and developers can be less than perfectly competitive in a subgame perfect nash equilibrium with these properties the optimal exercise policy and resulting values of developed and undeveloped assets are calculated explicitly the novel comparative statics are discussed in detail article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

real options and preemption under incomplete information abstract this paper introduces incomplete information and preemption into an equilibrium model of firms facing real investment decisions the optimal investment strategy may lie anywhere between the zero npv trigger level and the optimal strategy of a monopolist depending on the distribution of competitors costs and the implied fear of preemption our model implies that the equity returns of firms which hold real options and are subject to preemption will contain jumps and positive skewness

optimal management with potential regime shifts we analyze how the threat of a potential future regime shift affects optimal management we use a simple general growth model to analyze four cases that involve combinations of stock collapse versus changes in system dynamics and exogenous versus endogenous probabilities of regime shift prior work in economics has focused on stock collapse with endogenous probabilities and reaches ambiguous conclusions on whether the potential for regime shift will increase or decrease intensity of resource use and level of resource stock we show that all other cases yield unambiguous results in particular with endogenous probability of regime shift that affects system dynamics the potential for regime shift causes optimal management to become precautionary in the sense of maintaining higher resource stock levels

renewable energy investments under different support schemes a real options approach abstract this paper adopts a real options approach to analyze investment timing and capacity choice for renewable energy projects under different support schemes the main purpose is to examine investment behavior under the most extensively employed support schemes namely feed in tariffs and renewable energy certificate trading we consider both multiple sources of uncertainty under each support scheme and uncertainty with respect to any change of support scheme and we obtain both analytical when possible and numerical solutions in a nordic case study based on wind power we find that the feed in tariff encourages earlier investment nevertheless as investment has been undertaken renewable energy certificate trading creates incentives for larger projects in our baseline scenario and taking the fixed feed in tariff as a base the revenue required to trigger investments is 61 higher with renewable certificates at the same time investment capacity is 61 higher

the impact of industrial structure efficiency on provincial industrial energy efficiency in china abstract regional disparity in terms of industrial energy efficiency is noticeable in china due to the unbalanced economic progress in past decades analyzing the provincial industrial energy efficiency and its influencing factors is of great significance to formulate differentiated policies to date the influence of many social economic factors on the industrial energy efficiency have been examined but the impact of the inter industry structure has almost been ignored in this paper the slacks based measure model incorporating undesirable output is applied to evaluate the industrial energy efficiency both at the provincial level and the sectoral level in china for the period 2010 to 2016 then industrial structure efficiency is introduced which reflects the inter industry structure and takes the sectoral level energy efficiency into consideration and the impact of the industrial structure efficiency on provincial industrial energy efficiency is tested by tobit regression model the results show that huge discrepancies of provincial industrial energy efficiency exist and the industrial structure efficiency is confirmed to be a determinative factor to the provincial industrial energy efficiency with the coefficient of 0 525 policy recommendations are provided for adjusting the provincial inter industry structure and improving the industrial energy efficiency

resource extraction with a carbon tax and regime switching prices exercising your options this paper develops a model of a profit maximizing firm with the option to exploit a non renewable resource choosing the timing and pace of development the resource price is modelled as a regime switching process which is calibrated to oil futures prices a hamilton jacobi bellman equation is specified that describes the profit maximization decision of the firm the model is applied to a problem of optimal investment in a typical oils sands in situ operation and solved for critical levels of oil prices that would motivate a firm to make the large scale investment needed for oil sands extraction as well as to operate mothball or abandon the facility regime shifts can have an important effect on the optimal timing of investment and extraction the paper examines the effect of several carbon tax schemes on optimal timing of construction production and abandonment a form of green paradox is identified

modeling adaptation in multi state resource systems a current concern in the economics of natural resources is the role of adaptation in moderating the economic impact of exogenous changes in the resilience of natural resource systems we develop a bioeconomic model of the exploitation of a renewable resource that can exist in multiple states we then use this to consider the value of adaptive over non adaptive policies when there is a change in state and there are fixed costs of starting or stopping extraction we take adaptive policies to be those that base extraction on the current state of the system and the conditioning effect that has on the expected future state of the system we take non adaptive policies to be those that base extraction on the long run average state of the system we find that whether adaptive or non adaptive policies dominate depends on the fixed costs of starting or stopping extraction if the fixed costs of closure are very low non adaptive policies dominate however if the fixed costs of closure are high adaptive policies are preferred we use a numerical example based on the peruvian anchoveta fishery to illustrate the results

learning preemption and the degree of rivalry we examine a model in which all firms receive common signals as to the uncertain profitability of an investment whose actual payoffs are split only among those who develop the project earliest the benefit from preempting rivals yields an equilibrium reduction in the amount of learning and earlier development as the number or rivals increases the set of equilibria shrinks as the number of rivals gets large and in the limit only the competitive outcome occurs

real options and contingent convertibles with regime switching abstract we consider a firm with no assets in place but an option to invest in a project the investment is irreversible but delayable in a regime switching economy the firm issues equity straight bonds sbs and contingent convertibles cocos we provide the closed form prices for the firm s securities and the pricing and timing of the option our numerical analyses discover that issuing cocos instead of sbs induces much less agency cost of debt the agency cost is higher in a boom economy than in recession but the difference is small there is a unique cocos conversion ratio such that the agency cost arrives at the minimum value zero the inefficiencies arising from asset substitution and debt overhang are much more significant in recession than in boom only if the conversion ratio is not too small the two inefficiencies disappear during boom periods while the effects of the conversion rate on optimal capital structure and firm value and those of supervision and jump intensity on optimal cocos coupon are ambiguous and weak the stricter the supervision or the longer the economy remains in recession the less the option value and the optimal sbs coupon

sovereign credit spreads abstract the paper develops a structural credit risk model to study sovereign credit risk and the dynamics of sovereign credit spreads the model features endogenous default and recovery rates that both depend on the interaction between domestic output fluctuations and global macroeconomic conditions we show that sovereigns choose to default at higher levels of economic output once global macroeconomic conditions are bad this yields to default rates and credit spreads that are substantially higher compared to normal times we derive closed form expressions for sovereign debt values and default times and focus on the dynamics of sovereign credit spreads as opposed to standard theories of sovereign debt this paper s structural model generates much richer default patterns and non linearities through regime shifts in the global macroeconomic environment moreover changes in the global environment reveal the interconnectedness of the financial system

irreversible investment real options and competition evidence from real estate development abstract we examine the extent to which uncertainty delays investment and the effect of competition on this relationship using a sample of 1214 condominium developments in vancouver canada built from 1979 1998 we find that increases in both idiosyncratic and systematic risk lead developers to delay new real estate investments empirically a one standard deviation increase in the return volatility reduces the probability of investment by 13 percent equivalent to a 9 percent decline in real prices increases in the number of potential competitors located near a project negate the negative relationship between idiosyncratic risk and development these results support models in which competition erodes option values and provide clear evidence for the real options framework over alternatives such as simple risk aversion

geology or economics testing models of irreversible investment using north sea oil data this paper tests the main implications of models of irreversible investment using data from operations in the oil fields in the north sea discrete time hazard regression models are used to ascertain the influence of economic variables the expected price of oil the variance of the price of oil and the level of reserves on the lag between the discovery of a field and the decision to develop the field we are able to control for heterogeneity in the data by incorporating variables which account for both the geological features of each field and individual operator characteristics the results indicate that the expected price of oil and the level of reserves are important in influencing the appraisal duration but that the variance of the oil price is not variables capturing the non economic features of the individual fields are also found to be significant factors affecting the appraisal lag copyright 1994 by royal economic society

investment under regime uncertainty impact of competition and preemption abstract in this study we analyze the investment timing problem and introduce a model of two firms competing for investment preemption each of which knows in advance the time at which the economic condition that will have an impact on the investment changes we qualitatively show how two firms strategically optimize their investment timing taking into account competition and preemption

using the binomial model for the valuation of real options in computing optimal subsidies for chinese renewable energy investments abstract for the valuation and implementation of renewable energy investments the issue of providing private investors with a financial incentive to accelerate their investment is frequently a critical component we apply this principle to the chinese context this paper focuses on using the binomial model to compute the required subsidy that would incentivize investors to optimal immediate exercise of the american style option embedded at the launching phase of the projects for chinese renewable energy investments in addition this paper also aims at contrasting the binomial model with the more laborious monte carlo simulation previously used to evaluate the proper subsidy by using the same data but a different method and reducing the number of uncertain factors to one it is suggested these two methods have similar outcomes but the binomial method requires substantially less computation and is more self explanatory this paper thus provides government with an easy to implement alternative way to compute the required subsidy

optimal feed in tariff for solar photovoltaic power generation in china a real options analysis abstract the feed in tariff policy is widely used to promote the development of renewable energy china also adopts feed in tariff policy to attract greater investment in solar photovoltaic power generation this study employs real options method to assess the optimal levels of feed in tariffs in 30 provinces of china the uncertainties in co 2 price and investment cost are considered a method that integrates the backward dynamic programming algorithm and least squares monte carlo method is used to solve the model the results demonstrate that the feed in tariffs of 30 provinces range from 0 68 rmb kwh to 1 71 rmb kwh and the average level is 1 01 rmb kwh on this basis we find that the levels of sub regional feed in tariff announced in 2013 are no longer appropriate and should be adjusted as soon as possible we have also identified the implications of technological progress and carbon emission trading schemes as well as the importance of strengthening electricity transmission it has been suggested that the chinese government takes diverse measures including increasing research and development investment establishing and improving a nationwide carbon emission trading scheme and accelerating the construction of electricity transmission infrastructure to reduce the required feed in tariff and promote the development of solar photovoltaic power generation

real options and earnings based bonus compensation this study extends the works of mauer and sarkar 2005 and andrikopoulos 2009 by incorporating a regime dependent earnings based bonus into managerial compensation examining the individual effects of ownership shares and earnings based bonus compensation we find that the former provides managers with incentives to issue debt whereas the latter induces the opposite result although consistent impacts are found for the two types of compensation on both agency costs and the optimal investment decisions of managers when managerial compensation comprises both ownership shares and an earnings based bonus there are significant differences in the effects of these two types of performance compensation on managers optimal investment and financing decisions agency costs optimal debt ratios and credit spreads as a result of the specific interactions between the investment and financing decisions

strategic capacity investment under uncertainty this article considers investment decisions within an uncertain dynamic and duopolistic framework each investment decision involves to determine the timing and the capacity level the simultaneous analysis of timing and capacity decisions extends work on entry deterrence accommodation to consider a timing delay element we find that when applying an entry deterrence policy the first investor or incumbent overinvests in capacity for two reasons first it delays the investment of the second investor or entrant second the entrant will invest in less capacity we also find that greater uncertainty makes entry deterrence more likely

regional energy environmental performance and investment strategy for china s non ferrous metals industry a non radial dea based analysis globally china is the largest producer and consumer of common non ferrous metals china s non ferrous metals industry is energy intensive accounting for 24 of the total industrial energy consumption in 2011 in this study we adopted a non radial dea model to examine the energy environmental performance of the non ferrous metals industry from a regional perspective during the 2006 2011 period the energy environmental performance was evaluated by the eco efficiency under natural disposability en eco efficiency under managerial disposability em eco efficiency under natural and managerial disposability enm and enm with desirable congestion enm dc based on the en both the energy conservation and emission reduction potentials were calculated additionally the investment strategy was confirmed by regional types of damages to return dtr in the second stage study the factors influencing eco efficiency were measured using tobit regression and truncated regression models the results indicated that the efficiency scores of en em enm and enm dc were considerably different investment was effective in improving the energy environmental performance for twenty one regions during the whole study period henan had the highest energy conservation and emission reduction potentials the results obtained from the regression models were similar which displayed that the population density and energy price were responsible for the increase in eco efficiency while economic development level and industrial structure affected eco efficiency negatively based on these results policy recommendations for the non ferrous metals industry to improve their performance in a low carbon economy are suggested

profit sharing and european unemployment abstract this paper uses three criteria to evaluate profit sharing as a policy to help improve europe s economic performance a reduction of the real wage b expansion of firms profits and c restraint of the wage demand given an expansionary demand stimulus it is shown that under the alternative market structure of perfect competition monopoly and cournot nash oligopoly real wage tends generally to decline with sharing there also exists a positive share parameter such that firms profits will rise lastly if an expansionary demand policy is adopted the union will tend to demand a smaller wage increase under a share system this paper suggests that profit sharing may possess useful important properties that are relevant to the european problem

risk premia and preemption in r d ventures i analyze the impact of competition on the risk premia of r d ventures engaged in a multiple stage patent race with technical and market uncertainty after solving in closed form for the case of a two stage race in continuous time i show that a firm s risk premium decreases as a consequence of technical progress and increases when a rival pulls ahead compared to the case where firms collude r d competition erodes the option value to mothball a project reduces the completion time and the failure rate of r d and causes higher and more volatile risk premia numerical simulations reveal that competition can generate risk premia up to 500 annual basis points higher and up to three times more volatility than in a collusive industry

a real options approach to the valuation of a forestry investment abstract the theory of real options is used to model the optimal tree harvesting decision the value of the option to harvest is estimated using a dynamic programming approach and a general numerical solution technique suitable for any type of stochastic process for prices the conditions under which the optimal harvest time is independent of price are examined in addition the impact of assuming future lumber prices are mean reverting is considered it is found that option value and optimal cutting time are significantly different under the mean reversion assumption compared to geometric brownian motion

optimal land development decisions abstract this research models the development decision when net rents are growing geometrically and uncertainly and capital intensity is variable we derive simple rules for the optimal timing of land development projects based on the commonly used internal rate of return and net present value criteria we show that even under certainty projects are optimally delayed beyond the point where net present value becomes nonnegative if expected cash flows are growing the ability to vary capital intensity also raises the specter of perverse responses where increases in interest rates accelerate investment decisions the positive responses occur when growth rates are high or uncertainty is high

global estimates of energy growth nexus application of seemingly unrelated regressions as the world struggles to emerge from a global recession and financial crisis countries are looking for solutions to improve domestic economic performance and put people back to work global energy demand and prices have been resilient during the recession leading policy makers in countries with the potential to produce energy to look to that sector as a potential engine for economic growth the objective of this study is to undertake an empirical study on linkages among energy consumption economic growth fdi relative price and financial development i e broad money supply m2 in low income middle income high income non oecd high income oecd south africa middle east and north africa mena and the aggregate data of the world over a period of 1975 2011 data is analyzed by the im pesaran shin ips test of unit root to find out the order of integration the long run relationship is investigated through the pedroni 37 test of panel cointegration at last the seemingly unrelated regression sur method is used for estimation of the impact of growth factors on energy consumption in these regions the results reveal that each variable seem to have a unit root at level so we could investigate cointegration of the series at level on the basis of pedroni test we can bring to a close that series are cointegrated the results of seemingly unrelated regression sur suggests that gdp per capita has a positive impact on energy consumption in low income middle income south africa mena and aggregate data of the world however in high income oecd and non oecd regions there is no significant relationship been found in both regions fdi plays a pivotal role in increasing energy demand in middle income high income oecd and non oecd region which implies that whatever other benefits may accrue from fdi it should not be expected to generate sufficient energy in south africa mena and the world directly fdi enhancement policies should be supplemented to stimulate growth in those regions broad money supply exerts positive impact on energy demand in low income middle income high income non oecd and mena regions finally relative prices has either a positive impact i e middle income region and or a negative impact on energy consumption i e low income high income oecd and mena region the results conclude that lower energy prices reduce input costs for nearly all goods and services in the regions thus making them more affordable

energy efficiency analysis of the economic system in china during 1986 2012 a parallel slacks based measure approach abstract the economic system in china is composed of three internal parallel industries primary secondary and tertiary industries to examine energy efficiency of the economic system this paper proposes a parallel slacks based measure approach in the described approach the measures of energy efficiencies and energy saving potentials for the whole system and its three industries are defined application of the proposed approach to the economic system in china during 1986 2012 shows that it can be effectively used to measure energy efficiency of the evaluated system with several parallel sub systems the institutional influential factors of energy efficiency in china are also examined the following findings can be achieved based on the application results 1 the inefficiency of the economic system in china is mainly sourced from the lower energy performance of the secondary industry 2 energy efficiency of the economic system increases during the study time period with an exception during 2001 2005 3 it is better for the whole economic system to improve energy efficiency which can help to save much more energy consumption in production in china and 4 economic development is estimated to have positive impacts on national energy efficiency while energy structure adjustment and industrial structure optimization have negative effects on national energy efficiency