How does a book chapter in an edited volume compare to a peer reviewed paper? I have been invited to write a book chapter in an edited volume, relating to my field of work. I have a paper ready that I have not published and was planning to submit it soon. So, I am wondering is it worth to use that article for the book chapter, as both are on the same topic, or is it in a sense a waste of a journal paper, as book chapters might not be seen to have the same academic value? What should I do? Should I, instead, send the ready paper to a journal for a review and write a book chapter, based on a couple papers I have published, for instance?

Generally speaking, where does a book chapter stand? Is it something between a conference paper and a full-fledged journal article? Or, does does it have the same value as either of the above-mentioned publication types, in your opinion?
Like a lot of things in academia, I think this will heavily depend on what discipline you're in. In computer science for example, while there's nothing wrong with a book chapter, a paper at a conference or in a journal is typically more valuable.

The reason normally given is that papers are peer reviewed (as compared to edited), so they are somehow more 'valid'.

Having said that, there's always myriad exceptions. Writing a whole book that everyone uses is much better than a few papers. Later in the career, book chapters perhaps gain value as they're a mark of respect and prestige (once you've already proven your research ability).

As a counter-point though, from my limited experience, it seems that book chapters are much more common in bioinformatics and operations research, and thus are viewed more highly.

Talk to fellow academics in your area, their opinion will be the best guide.