 Tradeoffs between costly capacity investment and risk of regime shiftBruno Nkuiya () Economic Modelling, 2020, vol. 91, issue C, 117-127 Abstract: There is mounting evidence that increasing natural resource exploitation (e.g., fossil fuel extraction and consumption) could trigger irreversible dramatic ecological events like global warming. While capacity investment costs and the possibility to produce at full capacity are two factors that critically affect the exploitation rate, little is known about their effect on management. I generalize standard models of pollution control under the threat of dramatic regime shifts to investigate how optimal management changes with both factors. My analysis reveals that accounting for such factors gives rise to investment and emissions policies that challenge conventional wisdom. For instance, I find that under reasonable conditions, an exogenous threat of a doomsday event induces a cautious management strategy. Using parameters estimated from climatic data, my analysis shows that raising the discount rate can induce lower emissions, highlighting the complex interplay between the threat and both factors. Keywords: Costly capacity adjustment; Uncertainty; Optimal management; Pollution control; Regime shifts (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:91:y:2020:i:c:p:117-127 DOI: 10.1016/j.econmod.2020.05.022 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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