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Optimal conservation, extinction debt, and the augmented quasi-option value

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Author Info

  • Leroux, Anke D.
  • Martin, Vance L.
  • Goeschl, Timo

Abstract

Optimal conversion defines rules that determine the rate at which land is irreversibly moved out of conservation into production. What are the implications on these rules of allowing for a feedback between conversion decisions and the stochasticity of conservation benefits? We address this question using the well-known ecological mechanism of extinction debt as an illustration. This yields a model with a controlled-diffusion process at its core. We solve this model using a real-options approach, which leads to the conventional conversion rule as a special case. Calibrating the model to a specific case (Costa Rica), we demonstrate the presence of an augmented quasi-option value. The size of this value depends on the strength of the feedback.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 58 (2009)
Issue (Month): 1 (July)
Pages: 43-57

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Handle: RePEc:eee:jeeman:v:58:y:2009:i:1:p:43-57

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Web page: http://www.elsevier.com/locate/inca/622870

Related research

Keywords: Biodiversity conservation Learning Endogenous risk Real options Costa Rica;

References

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  1. Kassar, Ilhem & Lasserre, Pierre, 2004. "Species preservation and biodiversity value: a real options approach," Journal of Environmental Economics and Management, Elsevier, vol. 48(2), pages 857-879, September.
  2. Miller, Jon R & Lad, Frank, 1984. "Flexibility, learning, and irreversibility in environmental decisions: A bayesian approach," Journal of Environmental Economics and Management, Elsevier, vol. 11(2), pages 161-172, June.
  3. Andrew B. Abel & Janice C. Eberly, 1995. "Optimal Investment with Costly Reversibility," NBER Working Papers 5091, National Bureau of Economic Research, Inc.
  4. repec:ltr:wpaper:1989.02 is not listed on IDEAS
  5. Urvashi Narain & Michael Hanemann & Anthony Fisher, 2007. "The irreversibility effect in environmental decisionmaking," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 38(3), pages 391-405, November.
  6. Harry R Clarke & William J Reed, 1989. "Land Development and Wilderness Conservation Policies Under Uncertainty: A Synthesis," Working Papers 1989.02, School of Economics, La Trobe University.
  7. Mason, Charles F., 2001. "Nonrenewable Resources with Switching Costs," Journal of Environmental Economics and Management, Elsevier, vol. 42(1), pages 65-81, July.
  8. Scheinkman, Jose A. & Zariphopoulou, Thaleia, 2001. "Optimal Environmental Management in the Presence of Irreversibilities," Journal of Economic Theory, Elsevier, vol. 96(1-2), pages 180-207, January.
  9. Polasky, Stephen & Costello, Christopher & McAusland, Carol, 2004. "On trade, land-use, and biodiversity," Journal of Environmental Economics and Management, Elsevier, vol. 48(2), pages 911-925, September.
  10. Smulders, J.A. & Soest, D.P. van & Withagen, C.A.A.M., 2004. "International trade, species diversity and habitat conservation," Open Access publications from Tilburg University urn:nbn:nl:ui:12-140731, Tilburg University.
  11. G. Cornelis van Kooten & Robert A. Schipper, 2002. "Forest Conservation in Costa Rica when Nonuse Benefits are Uncertain but Rising," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(1), pages 150-160.
  12. Arrow, Kenneth J & Fisher, Anthony C, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 312-19, May.
  13. Conrad, Jon M., 2000. "Wilderness: options to preserve, extract, or develop," Resource and Energy Economics, Elsevier, vol. 22(3), pages 205-219, July.
  14. Conrad, Jon M., 1997. "On the option value of old-growth forest," Ecological Economics, Elsevier, vol. 22(2), pages 97-102, August.
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Cited by:
  1. Di Corato, Luca, 2011. "Optimal Conservation Policy under Imperfect Intergenerational Altruism," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114440, European Association of Agricultural Economists.
  2. Luca Di Corato & Michele Moretto & Sergio Vergalli, 2011. "Land Conversion Pace under Uncertainty and Irreversibility: too fast or too slow?," Working Papers 2011.84, Fondazione Eni Enrico Mattei.

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