An integrated approach to analyzing risk in bioeconomic models

Abstract

We provide a new integrated approach to analyzing risk in a setting where both exogenous and endogenous risks are present. We explicitly model these risks to understand their implications to the precautionary principle. We find that, among other things, the increase of exogenous risk in the presence of endogenous risk has a different impact on precaution than the increase in exogenous risk in the presence of only exogenous risk. While the latter is known to decrease precaution, the former unambiguously increases the precaution in the presence of stock effect. Recommendations for Resource Managers• Two kinds of risk are prevalent. Endogenous risk is created by human action. Exogenous risk is created by nature.• If there is only exogenous risk, managers can do nothing. Therefore, managers should allow for the depletion of resources.

Transboundary extraction of groundwater in the presence of hydraulic fracturing

“…This setting also has an implication for precaution. Note that precautionary theory is not applicable in all settings (Polasky et al, ; Poudel & Paudel, ). Since , the expression for fracking implies that the optimal strategy is to unambiguously exercise precaution in this setting.…”

Groundwater management: Waiting for a drought*

“…We assume that the drought hits at an uncertain date, , but to obtain clear‐cut results the duration of the event, , is assumed to be known with certainty . Thus, by using the terminology of Poudel and Paudel (), we assume exogenous uncertainty represented by uncertain arrival date of an event. Furthermore, we assume that the drought only hits once in the foreseeable future.…”

“…Multiple uncertainties are normally analyzed by undertaking numerical simulations with Monte Carlo experiments as an example . However, Poudel and Paudel () have suggested a theoretical approach to an investigation of both exogenous and endogenous uncertainties. In the model by Poudel and Paudel () both kinds of uncertainties is captured by introducing an uncertain threshold for a state variable, where an irreversible event happens with a given probability but a very simple linear objective function from Polasky, De Zeeuw, and Wagener () is adopted.…”

“…However, Poudel and Paudel () have suggested a theoretical approach to an investigation of both exogenous and endogenous uncertainties. In the model by Poudel and Paudel () both kinds of uncertainties is captured by introducing an uncertain threshold for a state variable, where an irreversible event happens with a given probability but a very simple linear objective function from Polasky, De Zeeuw, and Wagener () is adopted. By using the terminology from Poudel and Paudel (), we only consider one kind of exogenous uncertainty represented by uncertain arrival date of a drought.…”

“…By following the terminology in Poudel and Paudel () we introduce two kinds of exogenous uncertainty in our model.…”