‘Ecological monsters’ can be the legal outcome of rational choices made by three players: a firm, a policymaker and Nature. The firm asks the local policymaker for permission to undertake a real investment project in a stochastic framework, with real options and environmental externalities. The model consists of a non-cooperative game and its solution implies a bizarre outcome, both for the firm when it interrupts and abandons the investment project and for the policymaker when it is unable to avoid eco-monsters. Policy implications and partisan effects are explored.
CoxJ.C.RossS.A.RubinsteinM. (1979), ‘Option pricing: A simplified approach’, Journal of Financial Economics, Vol 7, No 3, pp 229–263.
7.
CukiermanA. (1980), ‘The effect of uncertainty on investment under risk neutrality with endogenous information’, Journal of Political Economy, Vol 88, pp 462–475.
8.
DixitA.K.PindyckR.S. (1994), Investment Under Uncertainty, Princeton University Press, Princeton, NJ.
9.
GrenadierS.R. (1996), ‘The strategic exercise of options: Development cascades and overbuilding in real estate markets’, Journal of Finance, Vol 51, No 5, pp 1653–1679.
10.
GrenadierS.R. (2000), Game Choices: The Intersection on Real Options and Game Theory, Risk Books, London.
11.
HamiltonW.F.MitchellG.R. (1990), ‘What is your R&D worth?’, McKinsey Quarterly, Vol 3, pp 150–160.
12.
LintO.PenningsE. (1997), ‘The option value of advanced R&D’, European Journal of Operational Research, Vol 103, No 1, pp 83–94.
13.
MarseguerraG.CortelezziF. (2006), ‘Investimenti irreversibili, interazione strategica e opzioni reali: Analisi teorica ed applicazioni’, Economia Politica, Vol 23, No 2, pp 265–302.
14.
PaddockJ.L.SiegelD.R.SmithJ.L. (1988), ‘Option valuation of claims on real assets: The case of offshore petroleum leases’, Quarterly Journal of Economics, Vol 103, No 3, pp 479–508.
15.
PindyckR.S. (1980), ‘Uncertainty and exhaustible resource markets’, Journal of Political Economy, Vol 88, No 6, pp 1203–1225.
16.
PindyckR.S. (1988), ‘Irreversible investment, capacity choice and the value of the firm’, American Economic Review, Vol 78, No 5, pp 969–985.
17.
QuiggL. (1993), ‘Empirical testing of real option-pricing models’, Journal of Finance, Vol 48, No 2, pp 621–640.
18.
SuttonJ. (1991), Sunk Costs and Market Structure, The MIT Press, Cambridge, MA.
19.
TitmanS. (1985), ‘Urban land prices under uncertainty?’, American Economic Review, Vol 75, No 3, pp 505–514.
20.
TravagliniG. (1999), ‘Investimenti reali e incertezza. Le opzioni reali e il mercato finanziario’, in ZanettiG., ed, Le decisioni di investimento, Il Mulino, Bologna.
21.
TrigeorisL. (1990), ‘A real options application in natural resource investments’, Advances in Futures and Options Research, Vol 4, pp 150–164.
22.
WeedsH. (2002), ‘Strategic delay in a real options model of R&D competition’, Review of Economic Studies, Vol 69, No 3, pp 729–747.
