Dynamic Resource Management: Intertemporal Substitution and Risk Aversion

Keith Knapp and Lars Olson

American Journal of Agricultural Economics, 1996, vol. 78, issue 4, 1004-1014

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.

Date: 1996
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