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Applications of Optimal Stopping in Resource Economics

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  • HARRY R. CLARKE
  • WILLIAM J. REED

Abstract

Some applications of optimal stopping rules in the analysis of resource economic problems are surveyed. The conceptual foundation for the approach stems from the dual roles of uncertainty and irreversibility in these problems. A stochastic adaptation of Wicksell's ‘tree‐cutting’ paradigm is exposited and shown to provide a rigorous methodology that is as intuitive as more familiar contingent‐asset approaches. Four resource economic applications are considered: environmental problems, urban development, bioeconomic harvesting and resource project timing and valuation.

Suggested Citation

  • Harry R. Clarke & William J. Reed, 1990. "Applications of Optimal Stopping in Resource Economics," The Economic Record, The Economic Society of Australia, vol. 66(3), pages 254-265, September.
    • Handle: RePEc:bla:ecorec:v:66:y:1990:i:3:p:254-265
    DOI: 10.1111/j.1475-4932.1990.tb01727.x
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    References listed on IDEAS

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    2. Abildtrup, Jens & Strange, Niels, 2000. "The option value of non-contaminated forest watersheds," Forest Policy and Economics, Elsevier, vol. 1(2), pages 115-125, August.
    3. Davis, Graham A. & Cairns, Robert D., 2012. "Good timing: The economics of optimal stopping," Journal of Economic Dynamics and Control, Elsevier, vol. 36(2), pages 255-265.
    4. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

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