Optimal environment management in the presence of irreversibilities (Q5931248)

A class of dynamic optimization problems, inspired by questions of the economics of environmental management, is considered. An environment under investigation has a fixed size that can be converted to another use. It is supposed that though conversion can be made in steps, it is irreversible and the future flow of benefits from each possible use is uncertain. The future benefits (per unit) from the original use, and from the alternative use, follow a diffusion process. In a fairly general type of optimization problem it is shown that the value function is the unique (viscosity) solution to the associated Hamiltonian-Jacobi-Bellman equation. Several properties of the solution for the case of constant relative risk aversion between 0 and 1 are exibited.