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Calibrated Stochastic Dynamic Models for Resource Management

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  • Howitt, Richard E.
  • Reynaud, Arnaud
  • Msangi, Siwa
  • Knapp, Keith C.

Abstract

In this paper we develop a positive calibrated approach to stochastic dynamic programming. Risk aversion, discount rate, and intertemporal substitution preferences of the decision-maker are calibrated by a procedure that minimizes the mean squared error from data on past decisions. We apply this framework to managing stochastic water supplies from Oroville Reservoir, located in Northern California. The calibrated positive SDP closely reproduces the historical storage and releases from the dam and shows sensitivity of optimal decisions to a decision-maker's risk aversion and intertemporal preferences. The calibrated model has average prediction errors that are substantially lower than those from the model with an expected net present value objective.

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Bibliographic Info

Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2002 Annual meeting, July 28-31, Long Beach, CA with number 19620.

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Date of creation: 2002
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Handle: RePEc:ags:aaea02:19620

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Keywords: Resource /Energy Economics and Policy;

References

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  9. Michael P. Keane & Kenneth I. Wolpin, 1994. "The solution and estimation of discrete choice dynamic programming models by simulation and interpolation: Monte Carlo evidence," Staff Report 181, Federal Reserve Bank of Minneapolis.
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  15. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  16. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-86, April.
  17. Minh Ha-Duong & Nicolas Treich, 1999. "Recursive Intergenerational Utility in Global Climate Risk Modeling," CIRANO Working Papers 99s-40, CIRANO.
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Cited by:
  1. Hughes, Neal, 2009. "Management of irrigation water storages: carryover rights and capacity sharing," 2009 Conference (53rd), February 11-13, 2009, Cairns, Australia 47642, Australian Agricultural and Resource Economics Society.
  2. Wang, H. Holly & Du, Wen, 2005. "Intertemporal Risk Management Decisions of Farmers under Preference, Market, and Policy Dynamics," 2005 Annual meeting, July 24-27, Providence, RI 19526, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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