Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2011/20: Fisheries Management under Irreversible Investment: Does Stochasticity Matter?

Diwakar Poudel (), Leif K. Sandal (), Sturla F. Kvamsdal () and Stein I. Steinshamn ()
Additional contact information
Diwakar Poudel: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
Leif K. Sandal: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
Sturla F. Kvamsdal: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
Stein I. Steinshamn: SNF, Institute for Research in Economics and Business Administration, Postal: SNF, Breiviksveien 40, N-5045 Bergen, Norway

Abstract: We present a continuous, nonlinear, stochastic and dynamic model for capital investment in the exploitation of a renewable resource. Both the resource stock and capital stock are treated as state variables. The resource owner controls fishing effort and the investment rate in an optimal way. Biological stock growth and capital depreciation rate are stochastic in the model. We find that the stochastic resource should be managed conservatively. The capital utilization rate is found to be a non-increasing function of stochasticity. Investment could be either higher or lower depending on the interaction between the capital and the resource stocks. In general a stochastic capital depreciation rate has only weak influence on optimal management. In the long run, the steady state harvest for a stochastic resource becomes lower than the deterministic level.

Keywords: Physical capital; irreversible investment; stochastic growth; long-term sustainable optimal

JEL-codes: Q20; Q22

29 pages, November 4, 2011

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