Implications of Simultaneity in a Physical Damage Function
Abstract
When analyzing associated economic systems, the modeler must often rely on highly simplified representations of complex physical systems. Herein, we consider a bioeconomic management problem in which the biological system exhibits simultaneity. We demonstrate theoretically that failure to account for such simultaneity influences conclusions about optimal economic behavior. We then empirically specify a structural damage relationship that explains the biological process by which an invasive species damages a domestic host. Estimation using an exceptional dataset on infestation of olives by the olive fruit fly indicates that underlying weather and management practices simultaneously affect the pest‟s population and the host‟s susceptibility to damage. The structural damage model outperforms the reduced-form approach typically taken, both in terms of fit and predictive ability. Our results underscore the importance of properly specifying a baseline damage function, namely one in the absence of any human intervention, before proceeding with analysis of an associated economic system.