A stochastic method of estimating fiscal impacts under an option pricing framework

This article describes a method of quantifying uncertain incremental impacts to local governments` cash flows that result from the construction and operation of large-scale commercial or industrial facilities. This Monte Carlo-type method is used by a computer model that projects revenues and expenditures on the basis of recent data obtained from affected jurisdictions` financial statements. The distributional characteristics of stochastic variables are based on financial and socioeconomic statistics to account r uncertainty. The primary out output of the model is the value of an option (e.g., insurance against negative fund balances) to be issued and subsequently repurchased by the responsible agency in lieu of conventional monitoring and mitigation programs. This value represents an impact fee and is designed to provide appropriate compensation for incremental impacts incurred by an affected jurisdiction. The secondary output is the maximum value in tax concessions that a local government could pay to induce decision makers to build in the area, given the degree of uncertainty associated with these projects.