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Pest - Resistance Development of Transgenic Crops



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The Option Value of Scientific Uncertainty on Pest Resistance Development of Transgenic Crops by Justus Wesseler Assistant Professor Environmental Economics and Natural Resources Group Social Sciences Department Wageningen University Hollandseweg 1 6706KN Wageningen The Netherlands Phone 31 317 482300 Fax 31 317 484933 e mail justus wesseler alg shhk wau nl Paper prepared for presentation at the 2nd World Congress of Environmental and Resource Economists Monterey CA USA June 24 27 2002 Abstract In this paper the option value of waiting under scientific uncertainty will be derived using the difference between the geometric Brownian motion and the mean reverting process by applying contingent claim analysis The results will be compared with those generated by either using a geometric Brownian motion or a mean reverting process only An example based on the decision problem whether or not to release herbicide tolerant rape seed in the EU will be used to illustrate the differences The paper contributes to the suggestion made by biologists to further analyze the sensitivity of the results using the real option approach provides insights about the magnitude of error that can be made by choosing the wrong process provides a solution to the problem and highlights the implication for the decision of whether or not to release transgenic crops The results show that scientific uncertainty is less important than one would expect at first hand Keywords biotechnology cost benefit analysis real option scientific uncertainty JEL Q D81 D61 The Option Value of Scientific Uncertainty on Pest Resistance Development of Transgenic Crops 1 Introduction Economists have proposed the real option theory for the ex ante valuation of costs and benefits from transgenic crops Farrow Morel Wu and Casman 2001 in their paper model the uncertain incremental net benefits from transgenic crops by using a geometric Brownian motion process1 The build up of pest resistance is included by adding a jump



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