Scandinavian Working Papers in Business Administration

Working Papers,
Örebro University, School of Business

No 2007:9: The Impact of Real Options on Willingness to Pay for Investments in Road Safety

Niclas A Krüger () and Mikael Svensson ()
Additional contact information
Niclas A Krüger: Department of Business, Economics, Statistics and Informatics, Postal: Örebro University, Department of Business, Economics, Statistics and Informatics, SE - 701 82 ÖREBRO, Sweden
Mikael Svensson: Department of Business, Economics, Statistics and Informatics, Postal: Örebro University, Department of Business, Economics, Statistics and Informatics, SE - 701 82 ÖREBRO, Sweden

Abstract: Abstract: Public investments are dynamic in nature, and decision making must account for the uncertainty, irreversibility and potential for future learning. In this paper we adapt the theory for investment under uncertainty for a public referendum setting and perform the first empirical test to show that estimates of the value of safety (VSL) from stated preference surveys are highly dependent on the inclusion of the option value. Our results indicate an option value of a major economic magnitude. This implies that previously reported VSL estimates are exaggerated.

Keywords: Value of a Statistical Life; Real Options; Contingent Valuation; Road Safety

JEL-codes: D61; D80; R41

23 pages, First version: November 7, 2007. Revised: October 17, 2008. Earlier revisions: February 8, 2008.

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