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Managing renewable resources facing the risk of regime shifts.

Aart de Zeeuw and Xiaoli He. 2015.

Abstract:

Resource management has to take account of the possibility of regime shifts in the ecological system that provides the resource. Regime shifts are uncertain and lead to structural changes in the system dynamics, lowering the productivity of the resource. Optimal management is driven by two considerations. First, it becomes more precautionary in case a higher stock of the renewable resource decreases the hazard rate of a regime shift. Second, it will either become more precautionary or more aggressive de- pending on the adjustment process towards the new steady state after the regime shift. This is essentially a consumption smoothing argument and the outcome depends on the concavity of the welfare function. In conclusion, facing the risk of regime shifts, optimal management is ambiguous but it is always precautionary if the marginal hazard rate of the regime shift is suciently high.

Keywords: Regime shifts, tipping, uncertainty, renewable resources, precaution

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