Friday, October 25, 2013

Option value of organs

A recent study in the Clinical Journal of the American Society of Nephrology argues that assigning a benefit, say $10,000, to a kidney donor could increase available organs for kidney transplantation by 5%. Although the price elasticity of kidneys is unclear, it seems logical to assume a normal market equilibrium. Ethical issues aside, the owner of an organ may be sub optimizing decisions by not exercising the put option optimally.

Organs are wasting assets, the market value of which are declining over time. The utility one gains from her organs is a function of remaining lifetime – with the asset lost in a catastrophic end. The net value of the asset is the difference between the two, that may show a U shaped curve. The put option held by the owner on her organs has an optimal exercise horizon prior to death. This is especially true if the organ is not essential to life, or acceptable backups exist as in the case of donating one out of the two functioning kidneys.

Tangible economic incentives, if applied correctly, can induce optimal exercise, with beneficial societal impacts.