Drug control agencies such as the U.S. FDA typically decide whether to approve a new therapeutic based upon the average treatment effect of the new therapeutic. Unless the mean effect of the new therapeutic is greater than a conventional treatment or placebo, the agency will not permits the new therapeutic’s use. In the presence of ex post heterogeneity in treatment effects, however, average tr...

This paper develops a spectral expansion approach to the valuation of contingent claims when the underlying state variable follows a one-dimensional diffusion with the infinitesimal variance a(x), drift b(x) and instantaneous discount (killing) rate r(x). The Spectral Theorem for self-adjoint operators in Hilbert space yields the spectral decomposition of the contingent claim value function. Ba...

This paper aims to contribute to the growing literature on the causes of consumer bankruptcy. It presents the consumer bankruptcy decision as an irreversible choice that has an embedded real option value. This allows the use of a well known framework for the study of decision making under uncertainty. The principal empirical finding is that cross-sectional variances of economic factors, such as...

Migration is an investment: it involves fixed, unrecoverable costs and uncertain future returns. If migration can be postponed, the option value of doing so may have positive value. Migration may not occur for a range of individuals who would otherwise migrate on a net present value basis. This paper models the migration decision using ideas developed by Pindyck (1991) and Dixit (1992). The opt...

In the climate change issue, the environmental irreversibility (risk of an acceleration of mitigation policies if the worse happen) has to be balanced with the investment irreversibility (risk of over-cautious policies). To explore this balance, we define an option value for a precautionary climate policy. Using the simplest decision-making model, we expose how option value relates to the expec...

Many recent descriptive studies find convex schooling-earnings profiles in developing countries. In these countries forward-looking students should attach option values to completing lower levels of schooling. Another option value may arise due to the uncertain economic environment in which the sequence of enrolment decisions is made. Most theoretical models that are used to motivate and interp...