Optimal conservation, extinction debt, and the augmented quasi-option value

Optimal conversion defines rules that determine the rate at which land is irreversibly moved out of conservation into production. What are the implications on these rules of allowing for a feedback between conversion decisions and the stochasticity of conservation benefits? We address this question using the well-known ecological mechanism of extinction debt as an illustration. This yields a model with a controlled-diffusion process at its core. We solve this model using a real-options approach, which leads to the conventional conversion rule as a special case. Calibrating the model to a specific case (Costa Rica), we demonstrate the presence of an augmented quasi-option value. The size of this value depends on the strength of the feedback.