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Calibrated Stochastic Dynamic Models for Resource Management

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

Abstract

In this paper we develop a positive calibrated approach to stochastic dynamic programming. Risk aversion, discount rate, and intertemporal substitution preferences of the decision-maker are calibrated by a procedure that minimizes the mean squared error from data on past decisions. We apply this framework to managing stochastic water supplies from Oroville Reservoir, located in Northern California. The calibrated positive SDP closely reproduces the historical storage and releases from the dam and shows sensitivity of optimal decisions to a decision-maker's risk aversion and intertemporal preferences. The calibrated model has average prediction errors that are substantially lower than those from the model with an expected net present value objective.

Suggested Citation

  • 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).
  • Handle: RePEc:ags:aaea02:19620
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    Cited by:

    1. Hughes, Neal, 2009. "Management of irrigation water storages: carryover rights and capacity sharing," 2009 Conference (53rd), February 11-13, 2009, Cairns, Australia 47642, Australian Agricultural and Resource Economics Society.
    2. Daniel Chami & Alessandra Scardigno & Giulio Malorgio, 2011. "Impacts of Combined Technical and Economic Measures on Water Saving in Agriculture under Water Availability Uncertainty," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 25(14), pages 3911-3929, November.
    3. 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).

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    Keywords

    Resource /Energy Economics and Policy;

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