Dynamic Resource Management: Intertemporal Substitution and Risk Aversion

11 Pages Posted: 25 Mar 2020

See all articles by Keith C. Knapp

Keith C. Knapp

University of California - Environmental Science

Lars J. Olson

University of Maryland - Department of Agricultural & Resource Economics

Date Written: November 1996

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.

Keywords: dynamic programming, intertemporal substitution, recursive utility, risk aversion, Q210, Q240, Q250

Suggested Citation

Knapp, Keith C. and Olson, Lars J., Dynamic Resource Management: Intertemporal Substitution and Risk Aversion (November 1996). American Journal of Agricultural Economics, Vol. 78, Issue 4, pp. 1004-1014, 1996, Available at SSRN: https://ssrn.com/abstract=3560443 or http://dx.doi.org/10.2307/1243856

Keith C. Knapp (Contact Author)

University of California - Environmental Science ( email )

College of Natural and Agricultural Sciences
Riverside, CA 92521
United States
(951) 827-4195 (Phone)
(951) 827-3993 (Fax)

HOME PAGE: http://www.facultydirectory.ucr.edu/cgi-bin/pub/public_individual.pl?faculty=356

Lars J. Olson

University of Maryland - Department of Agricultural & Resource Economics ( email )

2200 Symons Hall
College Park, MD 20742-5535
United States
301-405-7180 (Phone)

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