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Linking Natural Capital and Physical Capital : A Review of Renewable Resource Investment Models

In renewable resource harvesting, whether involving forests, fish, rangeland or wildlife, decisions concerning ‘investments’ involve two different forms of capital: natural capital (the specific natural resource under consideration) and physical capital (inherent in the industrial activity, such as fishing vessels or tree-harvesting machinery). Investment in the natural capital typically involves determining a desired rate of resource use (or resource growth), while investment in physical capital typically exhibits strong irreversibility, due to the often non-malleable nature of such capital. This leads to a complex dual investment problem, with investments in the resource itself and in the physical capital involved in harvesting the resource – a problem that provided the focus of a seminal paper by Clark, Clarke and Munro (Econometrica, 1979). The present chapter undertakes a review of the evolution of investment models in renewable resource industries, with the Clark, Clarke and Munro paper as a centre of reference, exploring some of its predecessors and its ‘descendants’, as well as some alternate directions taken in modelling resource-sector investment.