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Uncertainty and Natural Resources - Prudence Facing Doomsday

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  • Johannes Emmerling

    (Fondazione Eni Enrico Mattei (FEEM) and Euro-Mediterranean Center on Climate Change (CMCC))

Abstract

This paper studies the optimal extraction of a non-renewable resource under uncertainty using a discrete-time approach in the spirit of the literature on precautionary savings. We find that boundedness of the utility function, in particular the assumption about U(0), gives very different results in the two settings which are often considered as equivalent. For a bounded utility function, we show that in a standard two-period setting, prudence is no longer sufficient to ensure a more conservationist extraction policy than under certainty. If on the other hand we increase the number of periods to infinity, we find that prudence is not anymore not anymore necessary to induce a more conservationist extraction policy and risk aversion is sufficient. These results highlight the importance of the specification of the utility function and its behavior at the point of origin.

Suggested Citation

  • Johannes Emmerling, 2015. "Uncertainty and Natural Resources - Prudence Facing Doomsday," Working Papers 2015.49, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2015.49
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    References listed on IDEAS

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    8. Glenn C. Loury, 1978. "The Optimal Exploitation of an Unknown Reserve," Review of Economic Studies, Oxford University Press, vol. 45(3), pages 621-636.
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    10. Hayne E. Leland, 1968. "Saving and Uncertainty: The Precautionary Demand for Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 82(3), pages 465-473.
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    More about this item

    Keywords

    Expected Utility; Non-Renewable Resource; Prudence; Uncertainty;
    All these keywords.

    JEL classification:

    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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