# **Value of Improved Information about Forest Protection Values, with Application to Rainforest Valuation**<sup>**1**</sup>

# **1. Introduction**

This paper analyzes, mathematically and through simulations, “value of information” (VOI) problems with applications to natural resource valuation. The objects we more concretely have in mind are rainforests and their possible preservation. The values of rainforests are inherently uncertain. It can then be relevant to expend economic resources to obtain more precise assessments of their values, through investigative research. It may however turn out that the (expected ex ante) gain from obtaining more precise valuation estimates is not “worth it” as it may cost more than this expected value gain. This paper seeks to answer the following basic question: What is the additional value to a decision maker (principal; denoted P in the following) of more precise information (VOI) about the value of a specific forest, given that P can influence the decision to either save or convert (deforest) this forest; and this decision is made optimally on the basis of all current available information? We will, for reasons of tractability, focus on the additional ex ante expected value of _perfect_ information about the resource (called VOPI); which can be simulated in a straightforward way. In such cases, the additional information provided by any survey or other information-gathering process is assumed to fully reveal the true protection value of the object (although not necessarily its opportunity value). We will below also discuss relationships between VOPI and VOI in practically relevant cases, where some uncertainty will always remain after a valuation study has been carried out.

This line of research on explicit VOI analysis has little tradition in the environmental economics literature, but somewhat more in other fields including the medical risk literature (see references in section 2 below). Such interest is here often influenced by business perspectives including the development of new drugs and medical procedures, which can involve substantial investments and equity values. Small changes in precision can then easily have values multiple times that of carrying out a study. Our analysis provides direct information on the value of perfect information about tropical rainforest protection values. We also discuss the clues that our analysis gives to the value of improved but not perfect information. An aim of this study is to stimulate an increased use of such tools, in valuing the environment and natural resources more widely.

We give this problem two distinct considerations. The first is to find a value of perfect information given that decisions taken on the basis of such information are always globally

> 1 Strand: Development Research Group, Environment and Energy Team, the World Bank, Washington DC 20433, USA, e‐mail: jstrand1@worldbank.org. Siddiqui: Department of Civil Engineering and Applied Mathematics and Statistics, Johns Hopkins Systems institute, Johns Hopkins University, Baltimore, MD 21218, e‐mail: <u>sauleh.siddiqui@gmail.com. The research reported in this paper has benefitted from financial support through the</u> Knowledge for Change program. We especially thank the Norwegian Ministry of Climate and Environment for its support. We also thank Avinash Dixit, Roger Myerson and Michael Toman for helpful conversations and comments.

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