Calibrated Stochastic Dynamic Models for Resource Management

Richard E. Howitt, Arnaud Reynaud, Siwa Msangi () and Keith Knapp

No 19620, 2002 Annual meeting, July 28-31, Long Beach, CA from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association)

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.

Keywords: Resource/Energy; Economics; and; Policy (search for similar items in EconPapers)
Pages: 22
Date: 2002
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea02:19620

DOI: 10.22004/ag.econ.19620

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