Optimal Management with Potential Regime Shifts

Tinbergen Institute Discussion Paper No. 10-111/1

29 Pages Posted: 4 Nov 2010

See all articles by Stephen Polasky

Stephen Polasky

University of Minnesota, Twin Cities - Department of Applied Economics

Aart de Zeeuw

Tilburg University - Department of Economics

Florian Wagener

University of Amsterdam - Center for Nonlinear Dynamics in Economics and Finance (CeNDEF) - Department of Quantitative Economics; Tinbergen Institute

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Date Written: June 18, 2010

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.

Keywords: Optimal Management, Growth, Renewable Resources, Regime Shifts

JEL Classification: E61, O40, Q20, C61

Suggested Citation

Polasky, Stephen and de Zeeuw, Aart J. and Wagener, Florian O.O., Optimal Management with Potential Regime Shifts (June 18, 2010). Tinbergen Institute Discussion Paper No. 10-111/1, Available at SSRN: https://ssrn.com/abstract=1702906 or http://dx.doi.org/10.2139/ssrn.1702906

Stephen Polasky (Contact Author)

University of Minnesota, Twin Cities - Department of Applied Economics ( email )

1994 Buford Avenue
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Aart J. De Zeeuw

Tilburg University - Department of Economics ( email )

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Tilburg, 5000 LE
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+31-13-466-3042 (Fax)

Florian O.O. Wagener

University of Amsterdam - Center for Nonlinear Dynamics in Economics and Finance (CeNDEF) - Department of Quantitative Economics ( email )

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Amsterdam, 1018 WB
Netherlands

Tinbergen Institute ( email )

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Rotterdam, 3062 PA
Netherlands

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