Real Options in Resource Economics

Abstract

In the real options approach to capital budgeting, plans that allow for flexibility in the design or timing of an investment or economic action are valuable. Real options naturally arise in decisions to develop, extract, or harvest natural resources. We (a) review the existing literature in the economics of forestry, fishery, water, and nonrenewable resources; (b) illustrate the real options approach in resource economics through a series of simple models; and (c) suggest open questions and new areas of application when taking a real options approach to the development and management of natural resources.