Investment under uncertainty and option value in environmental economics

A question has arisen concerning the relationship between the financial theory of options and the concept of option value developed in the literature on environmental preservation. This article presents simple models in each approach and then demonstrates their equivalence. The conventional, differing interpretations of results in the two approaches are also shown to be consistent though consideration of the difference can lead to a deeper understanding of the concept of option value. (C) 2000 Elsevier Science B.V. All rights reserved.