Value Of Exercise Research Articles

Evaluating the Impact of Sustainability on Investment Property Performance

There is general agreement that environmental and social features, particularly those improving health and productivity of workers, will impact on the functionality of investment property. However there has been a range of opinions on whether this impact can currently be quantified through a valuation exercise (Lutzkendorf and Lorenz (2005), Sayce, Ellison and Smith (2004)).This paper examines the current literature on the assessment of the impact of environmental and social characteristics on investment property. It adds to the debate on the need for advanced techniques to assess the triple bottom line and identifies the key performance indicators that require measurement. An appropriate methodology to assess the triple bottom line result is described. The paper also incorporates a triple bottom line case study assessment in Brisbane, Australia, that demonstrates the ability of the cash flow approach to assess the worth of environmental and social characteristics. In conclusion, the paper identifies the additional data and research required to assess the worth of investment property using a triple bottom line approach.

Economic Valuation of on Site Material Damages of High Water on Economic Activities based in the City of Venice: Results from a Dose-Response-Expert-Based Valuation Approach

The paper focuses on the economic assessment of damages caused by high water in the city of Venice. In particular, we focus our attention on a valuation exercise that addresses the estimation of monetary, short period, on-site damages due to high water events on the different business activities located in Venice. On-site damages include both mitigation costs, which refer to all types of financial expenditure undergone to avert physical and material damages caused by flooding, and remediation costs, i.e. costs to be sustained for maintenance and substitution of affected building elements. Hence, the present study can be considered as a pioneering attempt to analytically quantify, from an economic point of view, on-site damages from high water. An integrated dose-response modelling and an expert-based valuation approach have been selected as the most suitable economic valuation methodology to shed light on the on-site damages. The main focus of the work is to assess dose-response relationships, which are able to describe the physical effects of high water on the different on-site damage categories, including inner and front doors maintenance, cleaning of pavements and maintenance of the walls. Bearing in mind such an economic valuation framework, we proceed with the estimation of on-site damages not only for the present high water situation (business as usual) but also extend the valuation exercise to three additional high water scenarios: (1) a climate change scenario; (2) a high water protection scenario; and, (3) a combined climate change and protection scenario. Estimation results show that the welfare loss due to on-site, short-term damages supported by the business activities ranges from 3.41 to 4.73 million Euro per year, respectively for the business as usual and climate change scenarios. Finally, we can conclude that the introduction of a public policy protection mechanism that defends the city of Venice from any flooding above 110 cm above the Punta della Salute Tidal Datum, such as the MOSE, will reduce the on-site damages supported by the business activities up to 2.87 million Euro per year.

Exploring Values, Context and Perceptions in Contingent Valuation Studies: The CV Market Stall Technique and Willingness to Pay for Wildlife Conservation

Public preferences for conservation and environmental management may be identified in willingness to pay (WTP) studies. Normally part of a contingent valuation exercise, WTP studies elicit monetary estimates of non-market economic goods. This paper describes a new approach to WTP, the CV Market Stall, a technique that adds a discursive, qualitative dimension to contingent valuation. It is suggested that the CV Market Stall technique is a good method for exploring attitudes and responses to environmental project proposals. The flexible format, with an emphasis upon information provision, discussion and learning would also allow contingent valuation to be extended to much more complex and uncertain environmental issues.

Mixing methods within stated preference environmental valuation: choice experiments and post-questionnaire qualitative analysis

Assessing public preferences for natural resources is a difficult task. The complexity of the research problem has encouraged practitioners to adopt qualitative approaches as exploratory and diagnostic tools within the conventionally more quantitative stated preference research. Building on best practice from previous studies, this paper reports the findings of post-questionnaire focus group analysis, investigating the adequacy of a choice experiment (CE) valuation exercise and its public acceptability. The specifics of the scenario and design choices are shown to markedly reduce problems of charity like and bid-realism/fair-share responses, observed in previous studies, and significant sensitivity to good characteristics is observed. However, a less tractable problem of valuing unfamiliar goods remains, with insights given regarding public acceptability and the usefulness of the findings to environmental decision-making.

Estimating society's willingness to pay to maintain viable rural communities*

Declining populations in rural and regional areas have become a high political priority in Australia. Calls for measures to support rural communities have been prompted by substantial population declines in some country areas. In Europe and the USA, similar political pressures to halt population losses in rural and regional areas are also apparent; often as a component of the multifunctionality of agriculture. The question addressed in the present paper is whether or not the Australian tax‐paying public would be willing to pay to avoid losses of people from rural and regional areas that may result from environmental protection measures. As an integral component of two recent non‐market, environmental valuation exercises using Choice Modelling, the value of the benefits associated with the maintenance of rural populations has been estimated. The results demonstrate that a positive existence value is held primarily by urban dwellers for rural population levels.

Understanding health state valuations: a qualitative analysis of respondents' comments.

Self-completed questionnaires (usually distributed by post) and visual analogue scales (VAS) are common means for collecting valuations for hypothetical EQ-5D health states. Although opportunities for respondents to comment on aspects of the exercise are often included, these data have rarely been the focus of analyses. This paper, therefore, reports on solicited and unsolicited written comments received in a New Zealand survey in 1999 to which 1360 people responded of whom approximately 50% made comments. The comments were systematically analysed via an inductive process that allowed principal themes to emerge with respect to understanding the peculiarities of respondents' valuations, particularly common 'data problems', and their perceptions as to the adequacy or otherwise of the EQ-5D classification system. From our findings we conclude that the valuation exercise imposes a substantial cognitive burden on respondents and many do not understand it (for a variety of reasons documented in the paper). Also, although there is some evidence for expanding the EQ-5D (generic) health-related quality of life dimensions, more research as to whether this holds for a larger sample and across cultural settings is needed. We offer recommendations for future research into understanding respondents' cognitive processes and possible revisions to the design and administration of the EQ-5D.

Testing a SEA methodology for the energy sector: a waste incineration tax proposal

Most Strategic Environmental Assessment (SEA) research has been preoccupied with SEA as a procedure and there are relatively few developments and tests of analytical methodologies. This paper applies and tests an analytical framework for an energy sector SEA. In a case study on a policy proposal for waste-to-energy taxation in Sweden, it studies changes in the energy system as a result of implementing the suggested tax by testing three analytical pathways: an LCA pathway, a site-dependent pathway, and a qualitative pathway. In addition, several valuation methods are applied. The assessment indicates that there are some overall environmental benefits to introducing a tax, but that benefits are modest compared to the potential. The methods are discussed in relation to characteristics for effective policy learning and knowledge uptake. The application shows that in many ways they complement each other rather than substitute for each other. The qualitative pathway is useful for raising awareness and getting a comprehensive view of environmental issues, but has limited potential for decision support. The precision increased as we went to LCA and to site-dependent analysis, and a hierarchy emerged in which the qualitative pathway filled rudimentary functions whereas the site-dependent analysis gave more advanced decision support. All methods had limited potential in supporting a choice between alternatives unless data was aggregated through a valuation exercise.

Governing snowmobilers in multiple-use landscapes: Swedish and Maine (USA) cases

Snowmobiling growth in North America and Sweden creates challenges in “governing the commons.” Snowmobiling contributes to the economy of distressed rural regions and enhances residents' quality of life; but quasi-open access to winter landscapes also breeds conflicts: among snowmobilers, with landowners, with other recreationists, and with environmentalists and ecosystem health. Common pool resource and impure public goods theories are used to interpret these conflicts and strategic interactions. Case studies in Sweden and Maine yield insights about conditions for sustainable management of multiple-use landscapes when property rights are complex and stakeholders diverse. The case studies utilize key informant interviews, tourist surveys, and a contingent valuation exercise to illustrate how innovative governance institutions, complemented by infrastructure investments, can mitigate conflicts, re-align incentives, and internalize costs. Local self-governance has evolved with state facilitation, but without changes in fundamental property law. Three keys are trail agreements between snowmobile clubs and landowners, clubs' norm formation and rule enforcement, and public–private investment in quality trails. These arrangements are strained by hot spot congestion, free riding, and unresolved conflicts with other recreationists.

Effects of Noise on Optimal Exercise Decisions: The Case of Risky Debt Secured by Renewable Lease Income

This paper considers the valuation and default exercise policy of risky coupon debt that is secured by a lease-encumbered noisy real asset. For parameter values used in our analysis, asset value noise is shown to reduce the value of waiting to default. Moreover, the borrower is shown to delay default exercise until the noisy signal of asset value is far into-the-money. This latter finding provides an information-based explanation for the apparent under-exercise of the mortgage default option that has been observed in the literature. An implication of this finding is that, if the claimholder recognizes that noise exists, but the empiricist—who is trying to compare observed exercise policy with that predicted by a noiseless model of asset prices—does not, a “sub-optimal” exercise policy may be inferred when in fact the policy is rational given the information available. This explanation is consistent with evidence from mortgage default studies as to why the observed default exercise boundary is lower than that predicted by standard theoretical option-based models.

Valuation on the Frontier: Calibrating Actual and Hypothetical Statements of Value

The lack of robust evidence showing that hypothetical behavior directly maps into real actions remains a major concern for proponents of stated preference nonmarket valuation techniques. This article explores a new statistical approach to link actual and hypothetical statements. Using willingness-topay field data on individual bids from sealed-bid auctions for a $350 baseball card, our results are quite promising. Estimating a stochastic frontier regression model that makes use of data that any contingent valuation survey would obtain, we derive a bid function that is not statistically different from the bid function obtained from subjects in an actual auction. If other data can be calibrated similarly, this method holds significant promise since an appropriate calibration scheme, ex ante or ex post, can be invaluable to the policy maker that desires more accurate estimates of use and nonuse values for nonmarket goods and services. Benefit-cost analysis remains the dominant paradigm used throughout the public sector. Yet, a recurring issue in properly estimating the total benefits of nonmarket goods and services is whether hypothetical statements map into real behavior. Some recently published studies provide evidence that suggests important differences exist between responses from real and hypothetical valuation questions. 1 This observation triggered a search for an ex ante and ex post procedure to correct the systematic bias between intentions and actions in valuation exercises. Recent technology using ex ante procedures has produced some strong evidence that hypothetical bias can be overcome by using a “cheap talk” scheme (see, e.g., Cummings and Taylor; List). Ex post calibration has also shown some signs of promise, as work due to Blackburn, Harrison,

Expansion versus Density in Barcelona: A Valuation Exercise

This study provides an alternative empirical approach to identify optimal urban growth when accounting for its associated environmental effects. It is assumed that preserving outer landscapes and enjoying reduced density levels are inversely related, and so households must trade them off. The exercise analyses whether more disperse urban growth would be socially desirable in a particular area, the metropolitan region of Barcelona. A contingent valuation exercise using a double-bounded format was undertaken and an extended version of the spike model was used to estimate the willingness to pay of changing to a less dense urban path. The results show that a less compact scenario would be welfare-increasing in aggregate terms. It is suggested that general proposals on compacting cities should not necessarily constitute a desirable planning goal.

On visible choice sets and scope sensitivity

In this paper we argue that the burgeoning empirical debate over scope sensitivity within contingent valuation studies is fundamentally incomplete in that it has neglected a systematic examination of certain effects of study design upon observed scope sensitivity. In particular we highlight the fact that in certain study designs the choice set initially offered (or “visible”) to respondents is changed in a stepwise manner as they progress through a valuation exercise, while other designs involve advance disclosure regarding the full extent of the final visible choice set prior to any choices or values being elicited. The issue of changes in the visible choice set is alluded to by Smith (J. Environ. Econom. Manage. 22(1) 71), who identifies this as a primary challenge to Kahneman and Knetsch's (J. Environ. Econom. Manage. 22(1) 57), well-known experimental results. Kahneman and Knetsch contend that it seems “highly implausible that this minor procedural change would significantly alter results” (p. 61), but do not test this assertion. We present experimental and field tests of the impact upon contingent values of varying the visible choice set through stepwise and advance disclosure. These dimensions of design are interacted with changes in the order in which nested goods are presented (bottom-up versus top-down). When a stepwise disclosure procedure is adopted, the observed scope sensitivity is substantially and significantly affected by the order in which goods are presented but such procedural variance is not observed within advance disclosure designs. Conjectures regarding the origin and implications of such findings are presented.

Estimates of the Economic Cost of Deforestation in the Amazon

This valuation exercise presents an estimation of total economic cost associated with deforestation in the Brazilian Amazon for the year 2000. Although some crucial methodological problems could not be totally overcome, we had the opportunity to apply more consistent and robust estimation procedures than the previous studies on the matter. We show that our final estimation value of US$ 108,1 per hectare year would be enough to promote forest sustainable uses. Along this line we discuss several ways in which some externalities counted into this value - particularly the global ones - could be captured by local producers.

Computational complexity analysis of least-squares Monte Carlo (LSM) for pricing US derivatives

One of the most important problems in option pricing theory is the valuation and optimal exercise of derivatives with American-style exercise features. These types of derivatives are found in all major financial markets. Simulation is a promising alternative to traditional numerical methods and has many advantages as a framework for valuing American options. Recently, Longstaff and Schwartz presented a simple, yet powerful, least-squares Monte Carlo (LSM) algorithm to approximating the value of US options by simulation. This article provides computational complexity analysis of the LSM algorithm. Essentially, the technique of computational complexity analysis is to break down a computational algorithm into logical modules and analyze the effect on the algorithm of adding or deleting logical modules. Computational complexity analysis is important in algorithm design because of structural differences in computer and human logic. Algorithms that seem perfectly natural and logical from the human perspective may sometime be found to contain unnecessary complexity when analysed from the computer's perspective. The results showed that a new algorithm constructed by removing the least-squares module altogether from the LSM algorithm improves not only the computational speed, but also produces results that are more accurate than the LSM.

Risk and Reward at the Speed of Light: A New Electricity Price Model

In this paper, we argue that, in a deregulated world, the most important challenge facing firms is to understand and appropriately model the price dynamics they face. Models of the price-dynamics process are the basis for computing the value of contracts, investments, or assets under uncertainty and for optimizing operating decisions. Recent research suggests that an excellent way to value assets and contracts in deregulated electricity markets is to view them as a series of real options (Deng, Johnson, Sogomonian, 1998; Hsu, 1998; Pilipovic, 1998). For example, a power plant represents the right, but not the obligation, to turn fuel into electricity every hour - a real option. Another example would be a transmission line, which can be viewed as a call option on the basis spread in electricity prices. All valuation exercises rely on understanding the dynamics of prices, which is the focus of this paper.

Warrant Valuation and Strategic Exercise in Continuous Time and Imperfect Competition

This paper focuses on the valuation of warrants using a game-theoretic approach, incorporating strategic exercise of the warrants. Unlike previous work on strategic exercise of warrants, this paper employs a continuous time framework for the case of an oligopolistic holding structure of the warrants and also allows the firm to apply a combination of uses for the exercise proceeds. The results suggest that American warrants might be worth less than European warrants, in much broader sets of parameters than previously shown in the literature. * The Eitan Berglas School of Economics, Tel Aviv University, Israel. I would like to thank the following people for their useful comments during the preparation of this paper: Simon Benninga, Iddo Eliazar, David Frankel and Avner Kalay.

Environmental value transfer: an application for the South East Queensland waterways

Economic valuations of the environmental resources provided by the waterways of South East Queensland are required for the evaluation of proposed environmental management strategies. Due to time and funding constraints it is unlikely that the environmental resources for each tributary of the river system will be subject to individual and explicit valuation. This paper reviews the literature about the validity of environmental benefit transfer, identifying the protocol for undertaking such a study. It then describes a study designed to transfer the estimated value of water quality improvements for the Bremer River to other waterways in South East Queensland. The study addresses some of the shortcomings of stated preference techniques to value the environment, including improving the quality of the information provided to survey respondents and the reliability of their responses by adopting a citizens' jury approach to the valuation exercise. In addition, the study is expected to provide the results in a form that will facilitate the estimation of a demand function for water quality improvements that will be meaningful for environmental value transfer to other sites with similar water quality issues.

Consistent Valuation of a Finite Stream of Cash Flows with a Terminal Value

If the forecast period is short, then the specification of the assumption for the calculation of the terminal may be an important element of the valuation exercise. To be specific, with respect to the reference year 0, the (present) value of the terminal value may be more than fifty percent of the total levered value. In this teaching note, we present a numerical example that values consistently a finite stream of cash flows with a terminal value from three different points of view: the Adjusted Present Value (APV) approach, the Capital Cash Flow (CCF) method and the traditional after-tax Weighted Average Cost of Capital that is applied to the Free Cash Flow (FCF). We assume an M & M world.

MEASURING FOREST RESOURCE VALUES: AN ASSESSMENT OF CHOICE EXPERIMENTS AND PREFERENCE CONSTRUCTION METHODS AS PUBLIC INVOLVEMENT TOOLS

MEASURING FOREST RESOURCE VALUES: AN ASSESSMENT OF CHOICE EXPERIMENTS AND PREFERENCE CONSTRUCTION METHODS AS PUBLIC INVOLVEMENT TOOLS

The impact of delivery lags on irreversible investment under uncertainty

We consider the valuation and rational exercise of irreversible investment opportunities in the presence of revenue uncertainty and delivery lags. In order to capture supply side market imperfections in the markets for investment goods, we assume that the lag depends on the revenue process faced by the investor. We show that such imperfections have a pronounced decelerating impact on rational investment demand as they may increase the value of waiting in excess of the exercise payoff even for projects which otherwise would be perceived as highly remunerative. We also consider the comparative static properties of the optimal investment policy and its value, and demonstrate that typically increased uncertainty decreases the investment incentives by increasing the value of waiting.