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Estimating Intertemporal Preferences for Natural Resource Allocation

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

In this article, we show how the degree of risk aversion, discounting, and preference for intertemporal substitution for a natural resource manager can be structurally estimated within a recursive utility framework. We focus on the management of a reservoir in California, and test the data for consistency with a recursive utility model specification versus standard time-additive separability. The results show that the data are consistent with a risk-averse manager with recursive preferences. The data also reject time-additive separability, with or without risk aversion, such as the standard constant relative risk aversion utility model. The improvement in model fit when recursive preferences are used is notable. Copyright 2005, Oxford University Press.

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File URL: http://hdl.handle.net/10.1111/j.1467-8276.2005.00781.x
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Article provided by Agricultural and Applied Economics Association in its journal American Journal of Agricultural Economics.

Volume (Year): 87 (2005)
Issue (Month): 4 ()
Pages: 969-983

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Handle: RePEc:oup:ajagec:v:87:y:2005:i:4:p:969-983
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  1. Michel Normandin & Pascal St-Amour, 1996. "Substitution, Risk Aversion, Taste Shocks and Equity Premia," Finance 9607001, EconWPA.
  2. Victor Aguirregabiria & Pedro Mira, 1999. "Swapping the Nested Fixed-Point Algorithm: a Class of Estimators for Discrete Markov Decision Models," Computing in Economics and Finance 1999 332, Society for Computational Economics.
  3. Susumu Imai & Neelam Jain & Andrew Ching, 2006. "Bayesian Estimation of Dynamic Discrete Choice Models," Working Papers 1118, Queen's University, Department of Economics.
  4. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, June.
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