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Assessing Economic Policies Using the Real Options Methodology - 3 ECTS

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).

Organised by	Wageningen School of Social Sciences (WASS), Agricultural Economics and Rural Policy
Date	Mon 3 February 2025 until Fri 7 February 2025
Venue	Leeuwenborch, building number 201 Hollandseweg 1 201 6706 KN Wageningen +31 (0)317 48 36 39

Registration

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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.

Learning outcomes

After successful completion participants are expected to be able to:

know the economic implications and relevance of the irreversibility effect
understand economic papers that apply real option models
apply discrete state models for decision under uncertainty and irreversibility
know the steps from discrete time, discrete state to continuous time, continuous stat models
develop real option models and analyse the results using numerical simulation methods

Activites

Lectures on the skills needed (25%)
Practicals deepening the skills obtained (25%)
Course paper applying the skills obtained (50%)

Assessment

Course paper between 10 and 20 pages.

Assumed prior knowledge

Good micro-economic knowledge and in particular calculus (derivatives, integrals), basic knowledge in stochastic processes and differential equations is an advantage.

Target group

PhD candidates. Min. 10 participants, max. 25 participants.

Schedule

	Monday	Tuesday	Wednesday	Thursday	Friday
9.00-10.00	Preparing	Preparing	Preparing	Preparing	Preparing
10.00-11.30	Introduction, Review Discounting and Integrals	Samuelson Theorem Random Walk	Investment Model Continuous Time	Continuous Time and Discrete State: Hazard Rate Function	Combination of Wiener Process and Jump Process
11.30-11.45	Coffee break	Coffee break	Coffee break	Coffee break	Coffee break
11.45-13.15	Exercises on Discounting and Integrals	Wiener Process and Itô Calculus	Estimating Drift and Variance Rates	Real Option and the Law, Precautionary Principle	Applications Combined Processes: Minimum Distance Requirements
13.15-14.30	Lunch break	Lunch break	Lunch break	Lunch break	Lunch break
14.30-16.00	Financial, Quasi, and Real Options. Some Commonly used Terminology	Examples and Exercises: Discrete Investment	Exercises and Examples Continuous Time	Examples and Exercises: Golden Rice, Foregone Benefits	Summary, Feedback and Course Evaluation
16.00-16.30	Coffee break	Coffee break	Coffee break	Coffee break	Coffee break
16.30-18.00	Exercises: Discrete Time and State	Example and Exercises: Discrete Investment	Exercises and Examples Continuous Time	Examples and Exercises: Storage Policies
18.30-20.30				Course dinner H41

Course fees
WGS PhD's with an approved TSP	€ 250
Other PhD's, postdocs and academic staff	€ 540
All others	€ 750

Cancellation conditions

The participants can cancel their registration free of charge 1 month before the course starts. A cancellation fee of 100% applies if a participant cancels his/her registration less than 1 month prior to the start of the course.

The organisers have the right to cancel the course no later than one month before the planned course start date in the case that the number of registrations does not reach the minimum.

The participants will be notified of any changes at their e-mail addresses.