Information and the concept of option value

Abstract

This paper examines the Arrow-Fisher-Henry concept of option value and analyzes its properties including its relationship to the value of information and the effects of increasing uncertainty about the future consequences of irreversible development. It is shown that this option value is distinct from but bounded by the value of information in the overall decision problem. Also, it is distinct from a concept of option value that appears in B. S. Bernanke, Quart. J. Econom. 98, 85–106 (1983). However, when there is a continuum of development levels, rather than a binary choice between full development and no development, some of these conclusions need to be modified.