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Optimal Regime Switching and Threshold Effects. Theory and Application to a Resource Extraction Problem under Irreversibility

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Abstract

We consider a general control problem with two types of optimal regime switch. The first one concerns technological and/or institutional regimes indexed by a finite number of discrete parameter values, and the second features ecological-like regimes relying on given threshold values for given state variables. We propose a general optimal control framework allowing to derive the first-order optimality conditions and in particular to characterize the geometry of the shadow prices at optimal switching times (if any). We apply this new optimal control material to address the problem of the optimal management of natural resources under ecological irreversibility, and with the possibility to switch to a backstop technology.

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  • Raouf Boucekkine & Aude Pommeret & Fabien Prieur, 2012. "Optimal Regime Switching and Threshold Effects. Theory and Application to a Resource Extraction Problem under Irreversibility," AMSE Working Papers 1213, Aix-Marseille School of Economics, France.
    • Handle: RePEc:aim:wpaimx:1213
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    1. Raouf Boucekkine & Aude Pommeret & Fabien Prieur, 2013. "Technological vs. Ecological Switch and the Environmental Kuznets Curve," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 95(2), pages 252-260.
    2. Larry Karp & Jiangfeng Zhang, 2016. "Taxes Versus Quantities for a Stock Pollutant with Endogenous Abatement Costs and Asymmetric Information," Studies in Economic Theory, in: Graciela Chichilnisky & Armon Rezai (ed.), The Economics of the Global Environment, pages 493-533, Springer.
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    5. Zampolli, Fabrizio, 2006. "Optimal monetary policy in a regime-switching economy: The response to abrupt shifts in exchange rate dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 30(9-10), pages 1527-1567.
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    8. Valente, Simone, 2011. "Endogenous Growth, Backstop Technology Adoption, And Optimal Jumps," Macroeconomic Dynamics, Cambridge University Press, vol. 15(3), pages 293-325, June.
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    12. repec:cor:louvrp:-2335 is not listed on IDEAS
    13. Prieur, Fabien & Tidball, Mabel & Withagen, Cees, 2013. "Optimal emission-extraction policy in a world of scarcity and irreversibility," Resource and Energy Economics, Elsevier, vol. 35(4), pages 637-658.
    14. BOUCEKKINE, Raouf & KRAWCZYK, Jacek B. & VALLEE, Thomas, 2011. "Environmental quality versus economic performance: a dynamic game approach," LIDAM Reprints CORE 2335, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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    2. Caliendo, Frank N. & Gorry, Aspen & Slavov, Sita, 2019. "The cost of uncertainty about the timing of Social Security reform," European Economic Review, Elsevier, vol. 118(C), pages 101-125.
    3. Nævdal, Eric & Vislie, Jon, 2013. "Resource Depletion and Capital Accumulation under Catastrophic Risk: Policy Actions against Stochastic Thresholds and Stock Pollution," Memorandum 24/2013, Oslo University, Department of Economics.
    4. David, Paul & Van Zon, Adriaan, 2012. "Optimal multi-phase transition paths toward a global green economy," MERIT Working Papers 2012-079, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    5. Elke Moser & Andrea Seidl & Gustav Feichtinger, 2014. "History-dependence in production-pollution-trade-off models: a multi-stage approach," Annals of Operations Research, Springer, vol. 222(1), pages 457-481, November.

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    More about this item

    JEL classification:

    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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