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In this paper we study the optimal forest conservation policy by a hyperbolically discounting society. Society comprises a series of non-overlapping imperfectly altruistic generations each represented by its own government. Under uncertainty about future pay-offs we determine, as solution of an intergenerational dynamic game, the optimal timing of irreversible harvest. Earlier harvest occurs and the option value attached to the forest clearing decision is eroded under both the assumptions of naïve and sophisticated belief about future time-preferences. This results in a bias toward the current generation gratification which affects the intergenerational allocation of benefits and costs from harvesting and conserving a natural forest.

A government bargains a mutually convenient agreement with a multinational corporation to extract a natural resource. The corporation bears the initial investment and earns as a return a share on the profits. The host country provides access and guarantee conditions of operation. Being the investment totally sunk, the corporation must account in its plan not only for uncertainty on market conditions but also for the threat of nationalization. In a real options framework where the government holds an American call option on nationalization we show under which conditions a Nash bargaining is feasible and leads to attain a cooperative agreement maximizing the joint venture surplus. We find that the threat of nationalization does not affect the investment time trigger but only the feasible bargaining set. Finally, we show that the optimal sharing rule results from the way the two parties may differently trade off rents with option value.

AbstractDeforestation results from the trade-off between benefits from forest conservation and economic profits associated with land development. However, as net gains are often uncertain, irreversible land development may later be regretted. To better inform conservation policies, we use a real options framework to model irreversible forest conversion under uncertain conservation benefits and determine the associated optimal long-run average rate of deforestation. We then analyze the impact of the demand for agricultural products on the rate of deforestation in the Brazilian Amazon. In a scenario analysis for the nine states of the Brazilian Amazon, we calculate: (i) the expected time for exhaustion of the current forest stock; and (ii) the potential forest coverage for the next 20, 100 and 200 years. Our results suggest that if forest benefits grow over time at a sufficiently high speed, they may significantly slow down deforestation. In contrast, the higher their volatility, the faster deforestation proceeds.