Optimal Management with Potential Regime Shifts

Aart de Zeeuw, Stephen Polasky and Florian Wagener

No 10-10, CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance

Abstract: We analyze how the threat of a potential future regime shift affects optimal management. We use a simple general growth model to analyze four cases that involve combinations of stock collapse versus changes in system dynamics, and exogenous versus endogenous probabilities of regime shift. Prior work has focused on stock collapse with endogenous probabilities and reaches ambiguous conclusions about the effect of potential regime shift on optimal management. We show that all other cases yield unambiguous results. In particular, with endogenous probability of regime shift that affects system dynamics the potential for regime shift causes optimal management to become precautionary.

Date: 2010
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Optimal management with potential regime shifts (2011)
Working Paper: Optimal Management with Potential Regime Shifts (2010)
Working Paper: Optimal Management with Potential Regime Shifts (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ams:ndfwpp:10-10

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