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The Effect of Small Intervention Costs on the Optimal Extraction of Dividends and Renewable Resources in a Jump-Diffusion Model

Author

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  • Framstad, Nils Chr.

    (Dept. of Economics, University of Oslo)

Abstract

A risk-neutral agent optimizes extraction of dividends or renewable natural resources modelled by a jump-diffusion stock process, where the optimal strategy is characterized as the minimal intervention required to keep the stock process inside a given region. The introduction of a small fixed cost per intervention, is shown to induce a loss at worst of order, corresponding to a minimal intervention size of order, under suitable conditions; there are degenerate cases if purely discontinuous harvesting is optimal for the frictionless problem. If extraction is reversible, at cost between half and twice the extraction cost, the exponents are 1/2 and 1/4, agreeing with the effect of fixed costs in a consumption–portfolio optimization problem for a risk-averse agent.

Suggested Citation

  • Framstad, Nils Chr., 2014. "The Effect of Small Intervention Costs on the Optimal Extraction of Dividends and Renewable Resources in a Jump-Diffusion Model," Memorandum 25/2014, Oslo University, Department of Economics.
    • Handle: RePEc:hhs:osloec:2014_025
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    File URL: http://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2014/memo-25-2014.pdf
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    References listed on IDEAS

    as
    1. Dylan Possamai & H. Mete Soner & Nizar Touzi, 2012. "Homogenization and asymptotics for small transaction costs: the multidimensional case," Papers 1212.6275, arXiv.org, revised Jan 2013.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Optimal stochastic control; resource extraction; dividend extraction; jump-diffusion model; transaction costs;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General

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