Valuation of Near-Market Endogenous Assets (PDF)

For many kinds of assets, the growth rate of the real asset stock is a nonlinear function of the economic owner’s decision whether to invest or extract the asset. Examples within the economy are primarily biological assets, both privately owned (such as those found in aquaculature and agriculture) and publicly owned or regulated (such as fish stocks, and in some case, timber stocks.) Optimal exploitation of the asset necessitates that the future possible growth rates in the asset must be considered when determining the optimal amount of extraction today. In this sense, the level of the asset is determined by the economic owner or regulator and is thus said to be endogenous. This paper considers existing methods for the valuation of these endogenous assets when observed transaction prices are lacking. In particular, we consider valuation in a near-market context, whereby the economist can only observe income flows from the asset. This near-market approach to asset valuation is particularly important for environmental accounting when transaction prices for the asset or the right to exploit the asset are lacking. We give sufficient restrictions on the revenue and cost structure of the firm in order to permit asset valuation based on average profits. In an empirical application, we combine economic and biomass data to value the US Bering Sea crab fisheries.

Dennis J. Fixler and Ryan Greenaway-McGrevy

JEL Code(s) E01 Published