Uncertainty and Natural Resources - Prudence Facing Doomsday

This paper studies the optimal extraction of a non-renewable resource under uncertainty using a discrete-time approach in the spirit of the literature on precautionary savings. We find that boundedness of the utility function, in particular the assumption about U(0), gives very different results in the two settings which are often considered as equivalent. For a bounded utility function, we show that in a standard two-period setting, prudence is no longer sufficient to ensure a more conservationist extraction policy than under certainty. If on the other hand we increase the number of periods to infinity, we find that prudence is not anymore not anymore necessary to induce a more conservationist extraction policy and risk aversion is sufficient. These results highlight the importance of the specification of the utility function and its behavior at the point of origin.


Issue Date:
May 27 2015
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/205459
Total Pages:
19
JEL Codes:
Q30; D81
Series Statement:
CCSD
049.2015




 Record created 2017-04-01, last modified 2018-01-20

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