A Real Options Approach to Amenity Valuation: The Role of Uncertainty and Risk Aversion

15 Pages Posted: 6 Mar 2018

Multiple version iconThere are 2 versions of this paper

Date Written: March 2018

Abstract

Many empirical studies in the fields of urban and environmental economics rely on the hedonic pricing framework. This paper draws attention to two important elements that are not covered by this theory: uncertainty and relocation costs. It develops a theoretical model where agents face uncertainty, but may accumulate savings as a form of self‐insurance. It shows that uncertainty pushes up relocation costs due to the option value of waiting, while self‐insurance helps to reduce this lock‐in problem. Moreover, the model suggests that the implicit price of environmental quality increases with uncertainty even if agents are risk‐neutral.

Keywords: hedonic pricing, real options, residential location, uncertainty

Suggested Citation

Mense, Andreas, A Real Options Approach to Amenity Valuation: The Role of Uncertainty and Risk Aversion (March 2018). Journal of Regional Science, Vol. 58, Issue 2, pp. 315-329, 2018. Available at SSRN: https://ssrn.com/abstract=3134943 or http://dx.doi.org/10.1111/jors.12355

Andreas Mense (Contact Author)

FAU Erlangen-Nürnberg ( email )

Findelgasse 7
Nürnberg, 90402
Germany

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
0
Abstract Views
105
PlumX Metrics