Journal Article

Strike When the Force Is with You: Optimal Stopping with Application to Resource Equilibria

Robert D. Cairns and Graham A. Davis

in American Journal of Agricultural Economics

Published on behalf of Agricultural and Applied Economics Association

Volume 89, issue 2, pages 461-472
Published in print May 2007 | ISSN: 0002-9092
Published online May 2007 | e-ISSN: 1467-8276 | DOI: https://dx.doi.org/10.1111/j.1467-8276.2007.01016.x

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Optimal investment in a nonrenewable resource project occurs when the rate of increase of the project's forward value falls to the force of interest. This stopping rule yields a financial interpretation of resource quality as being a property of the project rather than of individual units of reserves. It also leads to re-interpretations of (a) rent as the present value of the project rather than of units of reserves and (b) Hotelling's insight as, not a rule for the path of rents, but an equilibrium algorithm for price. The analysis is extended to sequential development of pesticides, antibiotics, and forests.

Keywords: optimal stopping; r-percent rule; investment timing; value of waiting; resource quality; resource equilibrium; sequential development; L650; Q160; Q230; Q300

Journal Article.  7211 words.  Illustrated.

Subjects: Manufacturing ; Renewable Resources and Conservation ; Non-renewable Resources and Conservation ; Agricultural Economics