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What a difference a stochastic process makes : epidemiological-based real options models of optimal treatment of disease

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Hanley_2017_ERE_StochasticProcess_CC.pdf (1.009Mb)
Date
07/2018
Author
Dangerfield, C. E.
Whalley, A. E.
Hanley, N.
Gilligan, C. A.
Funder
BBSRC
Grant ID
BB/L012561/1
Keywords
Disease control
Logistic SDE
Optimal timing
Real options
Stochastic epidemics
GE Environmental Sciences
HD28 Management. Industrial Management
Aerospace Engineering
Management, Monitoring, Policy and Law
T-NDAS
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Abstract
The real options approach has been used within environmental economics to investigate the impact of uncertainty on the optimal timing of control measures to minimise the impacts of invasive species, including pests and diseases. Previous studies typically model the growth in infected area using geometric Brownian motion (GBM). The advantage of this simple approach is that it allows for closed form solutions. However, such a process does not capture the mechanisms underlying the spread of infection. In particular the GBM assumption does not respect the natural upper boundary of the system, which is determined by the maximum size of the host species, nor the deceleration in the rate of infection as this boundary is approached. We show how the stochastic process describing the growth in infected area can be derived from the characteristics of the spread of infection. If the model used does not appropriately capture uncertainty in infection dynamics, then the excessive delay before treatment implies that the full value of the option to treat is not realised. Indeed, when uncertainty is high or the disease is fast spreading, ignoring the mechanisms of infection spread can lead to control never being deployed. Thus the results presented here have important implications for the way in which the real options approach is applied to determine optimal timing of disease control given uncertainty in future disease progression.
Citation
Dangerfield , C E , Whalley , A E , Hanley , N & Gilligan , C A 2018 , ' What a difference a stochastic process makes : epidemiological-based real options models of optimal treatment of disease ' , Environmental and Resource Economics , vol. 70 , no. 3 , pp. 691-711 . https://doi.org/10.1007/s10640-017-0168-x
Publication
Environmental and Resource Economics
Status
Peer reviewed
DOI
https://doi.org/10.1007/s10640-017-0168-x
ISSN
0924-6460
Type
Journal article
Rights
© The Author(s) 2017. Open Access. This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made.
Description
This work is funded jointly by a Grant from BBSRC (Grant No. BB/L012561/), Defra, ESRC, the Forestry Commission, NERC and the Scottish Government, under the Tree Health and Plant Biosecurity Initiative.
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  • University of St Andrews Research
URI
http://hdl.handle.net/10023/11166

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