Assessing Economic Policies Using the Real Options Methodology

Irreversible effects do play an important role in private as well as public decision making. The basis for the Precautionary Principle, an important principle in environmental policy, is uncertainty about irreversible costs of particular actions (e.g. the release of GMOs).

This course will address the issue of irreversibility from an economic point of view. Different approaches dealing with irreversibilities have emerged in the economic literature. The two most prominent once are the quasi option and real option value theory. Application of both approaches requires technical skills most students find difficult.

The objective of the course is to introduce the origins of the quasi option value and real option values, to teach the methods most commonly used (discrete methods such as decision trees; continuous time, continuous state models using stochastic processes; Itó calculus), and to discuss and practice various applications including non-renewable resource use, technology adoption, climate change, forestry, and food- and bio-safety.

The course will include two parts. One week of lectures and exercises with assignments and a course paper. For passing the course students need to participate in lectures and exercises (min. 90%) and submit the course paper within six month after the course.