Optimal decisions, option values, and regeneratio

The models in this thesis combine elements from the two major strands of the option value literature, while using the Sahel area of West Africa as a case study. Faced with uncertain growing conditions, farmers may be willing to pay conservation costs to guarantee the supply of quality soil. Both the benefits of conservation and the lack of conservation (mining) are uncertain. Finally, with the inclusion of a third, long-run period, the effects of the possibility of damage reversal can be considered.;In the first chapter, I summarize the thesis and briefly review option literature. In the second chapter, I present the "basic" 3-period model. Without the possibility of reversing the damage caused by soil mining, conservation is optimal in all time periods. Allowing reversibility makes optimal second period mining possible; first period conservation remains optimal. Results in subsequent chapters are compared to the results of the simple model. I also present definitions of option cost (the opportunity cost of conservation) and option value (the value the government attaches to farmer conservation).;I introduce learning, risk aversion, and time discounting in Chapter 3. Learning (the anticipation of probability revisions at the end of each period) and risk aversion tend to increase mining but under stringent conditions can increase conservation. Time discounting unambiguously increases mining.;I add two kinds of externalities to the simple model in Chapter 4. The cumulative efforts of farmers to conserve soil may improve climatic conditions and increase the probability of good growing conditions. This nondepletable externality increases the government's willingness to pay farmers to conserve (option value). The action of mining by one farmer, however, also has a negative impact on neighboring farmers. This depletable negative externality tends to increase option costs. Bargaining among farmers to reduce the externality may be possible.;In the final chapter, reversibility, learning, and externalities are reconsidered in the setting of continuous conservation levels. Uncertainty lowers the optimal level of conservation. Learning, under less stringent conditions than in Chapter 3, can increase conservation. Externality results parallel those of Chapter 4.