FEEM working papers "Note di lavoro" series
2011 .084

Land Conversion Pace under Uncertainty and Irreversibility: too fast or too slow?

Authors: Luca Di Corato, Michele Moretto, Sergio Vergalli
Series: Climate Change and Sustainable Development
Editor: Carlo Carraro
Type: Journal
Keywords: Optimal Stopping, Deforestation, Payments for Environmental Services, Natural Resources Management
JEL n.: C61, D81, Q24, Q58
JEL: Journal of Economics
Pages: Volume 110, Issue 1, pp 45-82
Date: 09/2013


In this paper stochastic dynamic programming is used to investigate land conversion decisions taken by a multitude of landholders under uncertainty about the value of environmental services and irreversible development. We study land conversion under competition on the market for agricultural products when voluntary and mandatory measures are combined by the Government to induce adequate participation in a conservation plan. We study the impact of uncertainty on the optimal conversion policy and discuss conversion dynamics under different policy scenarios on the basis of the relative long-run expected rate of deforestation. Interestingly, we show that uncertainty, even if it induces conversion postponement in the short-run, increases the average rate of deforestation and reduces expected time for total conversion in the long run. Finally, we illustrate our findings through some numerical simulations.

Suggested citation:  Luca Di Corato, Michele Moretto, Sergio Vergalli, Land conversion pace under uncertainty and irreversibility: too fast or too slow?, Journal of Economics, September 2013, Volume 110, Issue 1, pp 45-82, http://rd.springer.com/article/10.1007%2Fs00712-013-0348-2  

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