Luigi Sereno

Evaluating pharmaceutical R&D under technical and economic uncertainty

This study sets up a compound option approach for evaluating pharmaceutical R&D investment projects in the presence of technical and economic uncertainties. Technical uncertainty is modeled as a Poisson jump that allows for failure and thus abandonment of the drug development. Economic uncertainty is modeled as a standard diffusion process which incorporates both up-and downward shocks. Practical application of this method is emphasized through a case analysis. We show that both uncertainties have a positive impact on the R&D option value. Moreover, from the sensitivity analysis, we find that the sensitivity of the option with respect to economic uncertainty and market introduction cost decreases when technical uncertainty increases.

Environmental protection, public finance requirements and the timing of emission reductions

The effects of four environmental policy options for the reduction of pollution emissions, i.e. taxes, emission standards, auctioned permits and freely allocated permits, are analyzed. The setup is a real option model where the amount of emissions is determined by solving the firms profit maximization problem under each policy instrument. The regulator solves an optimal stopping problem in order to find the critical threshold for policy adoptions taking into account revenues from taxes and auctioned permits and government spending. In this framework we find the ranking of the alternative policy options in terms of their adoption lag and social welfare. We show that when the output demand is elastic, emission standards are preferred to freely allocated permits. Taxes and auctioned permits are always equivalent in terms of their adoption lag and social welfare, and also equivalent to emission standards when the regulator redistributes revenues.

Environmental policies, public abatement spending and the timing of emission reductions

Abstract Four environmental policy options for the reduction of pollution emissions, i.e. taxes, emission standards, auctioned permits and freely allocated permits, are analyzed in a real option model. The amount of emissions is determined by solving the firms profit maximization problem under each policy instrument. The regulator solves an optimal stopping problem in order to find the critical threshold for policy adoptions taking into account revenues from taxes and auctioned permits and government abatement spending. We find that standards are preferred to freely allocated permits if the output demand is elastic. Taxes and auctioned permits are equivalent in terms of their adoption lag and social welfare; however, through simulations, we show that these are less preferred than emission standards and freely allocated permits.