Abstract
Water shortages worldwide are increasingly managed via supply diversification. Yet efforts to optimise diversification have thus far failed to account for important empirical evidence on habit-driven water demand. To resolve this disconnect, an intertemporal optimisation model is developed to generate a supply portfolio that weights alternative sources of water according to the uncertainty of inflows, supply costs and habit formation. The model demonstrates that failure to account for habit-driven consumption leads to sup-optimal water infrastructure investments with too much emphasis on risky, weather-dependent sources, while weather-independent sources with guaranteed supply are underemphasised. Importantly, the optimal share of safe sources depends critically on how sensitive habit formation is to supply shocks. This implies that the benefits of policies targeting water saving behaviours and investments during periods of low supply extend beyond water conservation to more cost-effective supply portfolios. Empirical results demonstrate the importance of accommodating habit-driven demand within optimal diversification strategies.
| Original language | English |
|---|---|
| Pages (from-to) | 42-61 |
| Number of pages | 20 |
| Journal | Resource and Energy Economics |
| Volume | 53 |
| DOIs | |
| Publication status | Published - Aug 2018 |
Keywords
- model calibration
- portfolio optimisation
- stochastic habit formation
- water consumption
Cite this
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Addressing water shortages by force of habit. / Leroux, Anke D.; Martin, Vance L.; Zheng, Hao.
In: Resource and Energy Economics, Vol. 53, 08.2018, p. 42-61.Research output: Contribution to journal › Article › Research › peer-review
TY - JOUR
T1 - Addressing water shortages by force of habit
AU - Leroux, Anke D.
AU - Martin, Vance L.
AU - Zheng, Hao
PY - 2018/8
Y1 - 2018/8
N2 - Water shortages worldwide are increasingly managed via supply diversification. Yet efforts to optimise diversification have thus far failed to account for important empirical evidence on habit-driven water demand. To resolve this disconnect, an intertemporal optimisation model is developed to generate a supply portfolio that weights alternative sources of water according to the uncertainty of inflows, supply costs and habit formation. The model demonstrates that failure to account for habit-driven consumption leads to sup-optimal water infrastructure investments with too much emphasis on risky, weather-dependent sources, while weather-independent sources with guaranteed supply are underemphasised. Importantly, the optimal share of safe sources depends critically on how sensitive habit formation is to supply shocks. This implies that the benefits of policies targeting water saving behaviours and investments during periods of low supply extend beyond water conservation to more cost-effective supply portfolios. Empirical results demonstrate the importance of accommodating habit-driven demand within optimal diversification strategies.
AB - Water shortages worldwide are increasingly managed via supply diversification. Yet efforts to optimise diversification have thus far failed to account for important empirical evidence on habit-driven water demand. To resolve this disconnect, an intertemporal optimisation model is developed to generate a supply portfolio that weights alternative sources of water according to the uncertainty of inflows, supply costs and habit formation. The model demonstrates that failure to account for habit-driven consumption leads to sup-optimal water infrastructure investments with too much emphasis on risky, weather-dependent sources, while weather-independent sources with guaranteed supply are underemphasised. Importantly, the optimal share of safe sources depends critically on how sensitive habit formation is to supply shocks. This implies that the benefits of policies targeting water saving behaviours and investments during periods of low supply extend beyond water conservation to more cost-effective supply portfolios. Empirical results demonstrate the importance of accommodating habit-driven demand within optimal diversification strategies.
KW - model calibration
KW - portfolio optimisation
KW - stochastic habit formation
KW - water consumption
UR - http://www.scopus.com/inward/record.url?scp=85045478892&partnerID=8YFLogxK
U2 - 10.1016/j.reseneeco.2018.02.004
DO - 10.1016/j.reseneeco.2018.02.004
M3 - Article
VL - 53
SP - 42
EP - 61
JO - Resource and Energy Economics
JF - Resource and Energy Economics
SN - 0928-7655
ER -