Green revolution 2.0: a sustainable energy path

This repository item contains a single issue of Sustainable Development Insights, a series of short policy essays that began publishing in 2008 by the Boston University Frederick S. Pardee Center for the Study of the Longer-Range Future. The series seeks to promote a broad interdisciplinary dialogue on how to accelerate sustainable development at all levels.The Green Revolution in agriculture greatly increased crop yields and averted mass starvation, but it also turned small farms into factory farms that concentrated production in a few locations and reduced the diversity of crops. In this paper, Professor Nalin Kulatilaka, Co-Director of BU’s Clean Energy & Environmental Sustainability Initiative, calls for a Green Energy Revolution that decentralizes energy supplies through a smart electricity network. He argues that such a revolution could provide for a diversity of energy sources located closer to users, which in turn could shift consumption patterns, reduce losses and decrease overall energy demand. He concludes that shifting to such a system “will adopt clean energy technologies while fostering new businesses, creating new jobs and ultimately empowering society to reach new heights in energy conservation and sustainability“

The value of flexibility

This paper develops a framework to evaluate the economic value derived from a firm's ability to switch between different modes of production in the face of uncertain prices. The model, cast as a set of simulataneous stochastic dynamic programs, is solved for the ex-ante value of flexibility, the optimal technology choice, and critical prices at which switching is optimal. This general model of flexibility is used to synthesize several recent studies of real options encountered in capital budgeting. For example, the model yields as special cases (a) the value of waiting to invest, (b) the option to abandon, (c) the value of having an option to shut down, (d) the replacement timing and technology choice, and (e) the "time to build" option for irreversible projects that require sequential outlays. We use an illustrative example with two modes to show that the value of flexibility is monotonically increasing with price variability and switching frequency. The value of flexibility can contribute about a 15 percent improvement over the better fixed technology. Early in the life of the project it is optimal to switch modes when the difference between values under one mode (for the current period and optimal switching thereafter) and the other mode exceeds the switching cost. Towards the end of the economic life, the above difference must be significantly larger for swithcing to occur.School of Management, Boston Universit

Interdependencies between operating options

This paper presents a computationally feasible technique to value operating flexibilities in making capital budgeting decisions. We investigate how the value of a project is affected by the simultaneous introduction of several operating options. Previous studies have focused on operating options one at a time. A numerical example demonstrates the options to wait to invest, to abandon, and to temporarily shut down -- first, one at a time and then more than one at a time. -- As expected, the project value increases with the introduction of additional options. Adding new options, however, reduces the value of the previously available options. We also study the impact of adding new options on the critical boundaries at which existing options are exercised. These results help sharpen our intuition about the effects of and interactions between operating options. Easiliy implemented on a Personal Computer, the model is sufficiently general to handle various types of production flexibilities and assumptions regarding the economic environment. Hence, for the first time, we have available a quantitative technique that accounts for operating flexibilities that can be incorporated practically in the capital budgeting process

Valuing the flexibility of flexible manufacturing systems

This paper studies a topical issue: Flexible Manufacturing System (FMS) justification. We contend that current evaluation methods fall short of capturing a key advantage of an FMS: the value of flexibility. We identify various benefits of FMS that arise from the ability to switch between modes of production, and in particular, we model the value derived from the ability to better cope with uncertainty. A model to capture this value must solve for the value of flexibility together with the dynamic operating schedule of the production process. We present a stochastic dynamic programming model that captures the essential elements of this problem. A numerical example further demonstrates the optimal mode switching decision rules. This research has several important managerial implications. It emphasizes the importance of ex ante economic justification of flexible manufacturing systems and proposes a way to modify existing capital budgeting techniques to incorporate the special features of flexibility. As the value of flexibility depends inherently on the design of the manufacturing system, the design and justification stages must be conducted simultaneously. We also show how to include other operating decisions in the valuation model. These can include the investment timing or the decision to temporarily shut down or to abandon the project entirely

New Developments in Practice III: Riding the Wave: Extracting Value from Mobile Technology

New mobile devices, combined with content digitization, promise the creation of a vast global network that will have enormous and far-reaching impacts on how we work and live. Who will benefit from this technology, where its real opportunities lie, and how it will impact our organizations and our personal lives is not yet clear. We know that changes will occur and that these impacts will likely vary by firm, industry, and segment of society. What we don\u27t know is how and when these changes will happen. This uncertainty leaves business with the challenge of navigating between the opportunities presented by the new capabilities offered by mobile technology and the risks of being in the wrong place at the wrong time as their business ecosystem alters. This paper is a tutorial for both the IS practitioner and the IS academic. It presents the issues faced in applying wireless technology in business and suggests areas in which research might be fruitful. It concludes that mobile computing is a new and unstable technology that potentially can change much about how organizations work. However, the uncertainty surrounding mobile computing can make decision-making a challenge for many senior executives who would like to see a clear business case for their investment. Unfortunately, this goal is not always possible. Instead, executives must learn to recognize a variety of options for the future and manage these effectively and dynamically while keeping a close eye on the value proposition

Managerial Responses to Incentives: Control of Firm Risk, Derivative Pricing Implications, and Outside Wealth Management

We model a firm’s value process controlled by a manager maximizing expected utility from restricted shares and employee stock options. The manager also dynamically controls allocation of his outside wealth. We explore interactions between those controls as he partially hedges his exposure to firm risk. Conditioning on his optimal behavior, control of firm risk increases the expected time to exercise for his employee stock options. It also reduces the percentage gap between his certainty equivalent and the firm’s fair value for his compensation, but that gap remains substantial. Managerial control also causes traded options to exhibit an implied volatility smile

A meta-analysis of the investment-uncertainty relationship

In this article we use meta-analysis to investigate the investment-uncertainty relationship. We focus on the direction and statistical significance of empirical estimates. Specifically, we estimate an ordered probit model and transform the estimated coefficients into marginal effects to reflect the changes in the probability of finding a significantly negative estimate, an insignificant estimate, or a significantly positive estimate. Exploratory data analysis shows that there is little empirical evidence for a positive relationship. The regression results suggest that the source of uncertainty, the level of data aggregation, the underlying model specification, and differences between short- and long-run effects are important sources of variation in study outcomes. These findings are, by and large, robust to the introduction of a trend variable to capture publication trends in the literature. The probability of finding a significantly negative relationship is higher in more recently published studies. JEL Classification: D21, D80, E22 1

An integration of the resource based view and the real options Theory for Investiments in Outside Opportunities

There is a growing trend by established firms to use a multitude of External Corporate Venturing (ECV) mechanisms to acquire external innovations. In this paper, we develop a framework within which firms choose ECV mechanisms that are best aligned with characteristics of the external opportunity and the firm’s internal capabilities. Our approach integrates the Resource-based View of the firm with Real Options theory and draws on insights derived from interviews with managers