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Dynamic Resource Management: Intertemporal Substitution and Risk Aversion

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  • Keith C. Knapp
  • Lars J. Olson

Abstract

We consider resource management with recursive preferences. These generalize expected utility while eliminating some well-known difficulties. Monotonicity and convergence properties of optimal decision rules are established using lattice programming methods. Empirical applications are rangeland and groundwater management. Decreasing the intertemporal elasticity of substitution implies greater (lower) resource usage with limited (abundant) stocks. This moderates stock evolution and stabilizes consumption. Increasing risk aversion implies the same or reduced usage over the state space. Intertemporal substitution has a substantial effect on the optimal decision rule and a moderate effect on the limiting distribution, while risk aversion has a very small effect. Copyright 1996, Oxford University Press.

Suggested Citation

  • Keith C. Knapp & Lars J. Olson, 1996. "Dynamic Resource Management: Intertemporal Substitution and Risk Aversion," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(4), pages 1004-1014.
  • Handle: RePEc:oup:ajagec:v:78:y:1996:i:4:p:1004-1014
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    File URL: http://hdl.handle.net/10.2307/1243856
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    Cited by:

    1. T Heikkinen & K Pietola, 2006. "Rural Investment and the Cost of Income Uncertainty," ERSA conference papers ersa06p51, European Regional Science Association.
    2. Eirik S. Amundsen & Frank Jensen, 2016. "Drought and Groundwater Management," IFRO Working Paper 2016/04, University of Copenhagen, Department of Food and Resource Economics.
    3. Minh Ha-Duong & Nicolas Treich, 1999. "Recursive Intergenerational Utility in Global Climate Risk Modeling," CIRANO Working Papers 99s-40, CIRANO.
    4. Heikkinen, T. & Pietola, K., 2009. "Investment and the dynamic cost of income uncertainty: The case of diminishing expectations in agriculture," European Journal of Operational Research, Elsevier, vol. 192(2), pages 634-646, January.
    5. repec:eee:eneeco:v:64:y:2017:i:c:p:1-12 is not listed on IDEAS
    6. Svenja Hector, 2013. "Accounting for Different Uncertainties: Implications for Climate Investments?," Working Papers 2013.107, Fondazione Eni Enrico Mattei.
    7. Msangi, Siwa, 2005. "Measuring the Gains to Groundwater Management with Recursive Utility," 2005 Annual meeting, July 24-27, Providence, RI 19212, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    8. repec:kap:enreec:v:67:y:2017:i:2:d:10.1007_s10640-015-9989-7 is not listed on IDEAS
    9. Howitt, Richard E. & Reynaud, Arnaud & Msangi, Siwa & Knapp, Keith C., 2002. "Calibrated Stochastic Dynamic Models for Resource Management," 2002 Annual meeting, July 28-31, Long Beach, CA 19620, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    10. Emmanuelle Augeraud-Véron & Giorgio Fabbri & Katheline Schubert, 2017. "The Value of Biodiversity as an Insurance Device," Working Papers halshs-01493965, HAL.
    11. Phoebe Koundouri, 2004. "Current Issues in the Economics of Groundwater Resource Management," Journal of Economic Surveys, Wiley Blackwell, vol. 18(5), pages 703-740, December.
    12. Svenja Hector(), "undated". "Accounting for Different Uncertainties: Implications for Climate Investments?," Working Papers ETH-RC-13-007, ETH Zurich, Chair of Systems Design.
    13. COUTURE Stephane & REYNAUD Arnaud, 2006. "Multi-stand Forest Management Under a Climatic Risk: Do time and Risk Preferences Matter?," LERNA Working Papers 06.17.210, LERNA, University of Toulouse.
    14. Kim, C.S. & Fuglie, Keith O. & Wallander, Steve & Wechsler, Seth, 2015. "Endogenous Technical Change and Groundwater Management: Revisiting the Gisser-Sanchez Paradox," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205350, Agricultural and Applied Economics Association;Western Agricultural Economics Association.
    15. Smith, William & Son, Young Seob, 2005. "Can the desire to conserve our natural resources be self-defeating?," Journal of Environmental Economics and Management, Elsevier, vol. 49(1), pages 52-67, January.
    16. 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).
    17. Amundsen, Eirik Schrøder & Jensen, Frank, 2016. "Drought and groundwater management," Working Papers in Economics 05/16, University of Bergen, Department of Economics.
    18. Kiran Krishnamurthy, Chandra, 2012. "Optimal Management of Groundwater under Uncertainty: A Unified Approach," CERE Working Papers 2012:19, CERE - the Center for Environmental and Resource Economics, revised 30 Jun 2014.
    19. Frechette, Darren L. & Wen, Fang-I, 2002. "Risk Aversion, Uncertainty Aversion, And Variation Aversion In Applied Commodity Price Analysis," 2002 Conference, April 22-23, 2002, St. Louis, Missouri 19062, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    20. Eirik S. Amundsen & Frank Jensen, 2016. "Drought and Groundwater Management," CESifo Working Paper Series 5968, CESifo Group Munich.
    21. Shaw, W. Douglass & Woodward, Richard T., 2008. "Why environmental and resource economists should care about non-expected utility models," Resource and Energy Economics, Elsevier, vol. 30(1), pages 66-89, January.
    22. Epaulard, Anne & Pommeret, Aude, 2003. "Optimally eating a stochastic cake: a recursive utility approach," Resource and Energy Economics, Elsevier, vol. 25(2), pages 129-139, May.

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