Interest Rate Manipulation, Environmental Damage, and Loss Valuation

Document Type

Article

Publication Date

4-15-2009

Publication Title

Journal of Business Valuation and Economic Loss Analysis

DOI

10.2202/1932-9156.1044

ISSN

1932-9156

Abstract

The damage generated by Hurricane Katrina caused significant private as well as social costs. The water and force from the hurricane and subsequent flooding caused immediate property damage, but also potential environmental contamination over time. The decision on the part of property owners affected by Katrina to deal with damaged property must take into account both the private and social costs. This paper explores this decision making process using a real-options model. In particular, we focus on the element of time preference in this decision. We analyze the impact that changes in monetary policy, and ultimately the discount rate, have on the decision to repair or rebuild a property damaged by flooding. According to the theory, rising interest rates would suggest a greater propensity to defer the option to rebuild damaged properties, whereas falling interest rates cause property owners to reach the decision to rebuild properties relatively more quickly.

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