Internal Consistency In Models Of Optimal Resource Use Under Uncertainty
For several decades, economists have been concerned with the problem of optimal resource use under uncertainty. In many studies, researchers assume that prices evolve according to an exogenous stochastic process and solve the corresponding dynamic optimization problem to yield an optimal decision rule for exploitation of the resource. This study is motivated by our attempt to understand the relationship between efficiency in resource markets and optimal harvest decisions in which price is an exogenous state variable. The literature on optimal commodity storage finds that in a rational expectations equilibrium commodity prices are stationary and serially correlated. Yet recent papers on optimal timber harvesting that assume exogenous stationary prices generate harvest rules inconsistent with the price processes on which they are based. In this study, we investigate the appropriate form of the stochastic process governing prices of renewable resources. We develop a model in which timber is supplied by profit-maximizing managers with rational expectations and aggregate timber demand is subject to independent exogenous shocks. In contrast to earlier studies, prices are endogenously determined. Managers know the structure of the timber market and form expectations of future market equilibria in making optimal harvesting decisions. We show under general conditions that efficient timber prices are stationary and serially correlated. Stationarity and serial correlation are shown to arise from two sources: the occurrence of stock-outs (i.e., depletion of the inventory) and stock-dependent growth of the resource. Further, we show that prices retain these properties even in the absence of stock-outs. Simulations are used to further illustrate the analytical results. Our findings have implications for a large number of economic analyses of optimal resource use. First, our results reveal why extraction rules for renewable resources based on exogenous price specifications are internally inconsistent, even when the specification conforms to the stochastic behavior of prices generated by an efficient market. These prices arise in a particular structural environment, and if large numbers of resource managers adopt the harvesting rule, the underlying structural environment would change, and the price process would deviate from that used to derive the harvesting rule. Second, we show that there can be no gains from exploiting the stochasticity of resource prices in a rational expectations world, a finding that challenges the prescriptive policies for resource use found in many studies, including those on option values. Third, our results show that time-series analyses designed to test for the efficiency of renewable resource markets cannot distinguish prices generated in an efficient market from those generated in an inefficient market. Finally, we extend the literature on optimal storage. Previous models of commodity storage models are shown to be a special case of our model involving age-independent depreciation of the inventory.
|Date of creation:||2001|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (414) 918-3190
Fax: (414) 276-3349
Web page: http://www.aaea.orgEmail:
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- William A. Brock & Cars H. Hommes, 1997.
"A Rational Route to Randomness,"
Econometric Society, vol. 65(5), pages 1059-1096, September.
- Deaton, Angus & Laroque, Guy, 1992.
"On the Behaviour of Commodity Prices,"
Review of Economic Studies,
Wiley Blackwell, vol. 59(1), pages 1-23, January.
- Angus Deaton & Guy Laroque, 1990. "On The Behavior of Commodity Prices," NBER Working Papers 3439, National Bureau of Economic Research, Inc.
- Deaton, A. & Laroque, G., 1989. "On The Behavior Of Commodity Prices," Papers 145, Princeton, Woodrow Wilson School - Development Studies.
- Deaton, A. & Laroque, G., 1989. "On The Behavior Of Commodity Prices," Papers 145, Princeton, Woodrow Wilson School - Public and International Affairs.
- Harry R Clarke & William J. Reed, 1989.
"The Tree-Cutting Problem in a Stochastic Environment: The case of Age Dependent Growth,"
1989.01, School of Economics, La Trobe University.
- Clarke, Harry R. & Reed, William J., 1989. "The tree-cutting problem in a stochastic environment : The case of age-dependent growth," Journal of Economic Dynamics and Control, Elsevier, vol. 13(4), pages 569-595, October.
- Albers, Heidi J., 1996. "Modeling Ecological Constraints on Tropical Forest Management: Spatial Interdependence, Irreversibility, and Uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 30(1), pages 73-94, January.
- Paddock, James L & Siegel, Daniel R & Smith, James L, 1988. "Option Valuation of Claims on Real Assets: The Case of Offshore Petroleum Leases," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 479-508, August.
- Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
- Scheinkman, Jose A & Schechtman, Jack, 1983. "A Simple Competitive Model with Production and Storage," Review of Economic Studies, Wiley Blackwell, vol. 50(3), pages 427-41, July.
- Brock, W. & Lakonishok, J. & Lebaron, B., 1991.
"Simple Technical Trading Rules And The Stochastic Properties Of Stock Returns,"
90-22, Wisconsin Madison - Social Systems.
- Brock, William & Lakonishok, Josef & LeBaron, Blake, 1992. " Simple Technical Trading Rules and the Stochastic Properties of Stock Returns," Journal of Finance, American Finance Association, vol. 47(5), pages 1731-64, December.
- Reed, William J., 1993. "The decision to conserve or harvest old-growth forest," Ecological Economics, Elsevier, vol. 8(1), pages 45-69, August.
- Pindyck, Robert S, 1980. "Uncertainty and Exhaustible Resource Markets," Journal of Political Economy, University of Chicago Press, vol. 88(6), pages 1203-25, December.
- Thomas A. Thomson, 1992. "Optimal Forest Rotation When Stumpage Prices Follow a Diffusion Process," Land Economics, University of Wisconsin Press, vol. 68(3), pages 329-342.
- Chavas, Jean-Paul, 1999. "On The Economic Rationality Of Market Participants: The Case Of Expectations In The U.S. Pork Market," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(01), July.
- repec:cup:cbooks:9780521326162 is not listed on IDEAS
- Pindyck, Robert S, 1984. "Uncertainty in the Theory of Renewable Resource Markets," Review of Economic Studies, Wiley Blackwell, vol. 51(2), pages 289-303, April.
- Swierzbinski, Joseph E. & Mendelsohn, Robert, 1989. "Information and exhaustible resources: A Bayesian analysis," Journal of Environmental Economics and Management, Elsevier, vol. 16(3), pages 193-208, May.
- Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
When requesting a correction, please mention this item's handle: RePEc:ags:aaea01:20712. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search)
If references are entirely missing, you can add them using this form.