Essays on fundamental natural capital valuation

This dissertation introduces mathematical rigor and empirical grounding into natural capital valuation, focusing solely on valuations determined from the prospective analyses of a capital stock's growth and per-unit earnings. This approach is akin to fundamental analysis in securities valuation, where the aggregate value of a capital stock is the net present value of its prospective aggregate earnings. While natural capital valuation, like securities analysis, involves many nuances, this dissertation simplifies the problem by not considering uncertainty in stock growth or earnings, nor multiple, interacting capital stocks. These limitations reduce the valuation to solving an ordinary differential equation (ODE)—a much-simplified Hamilton-Jacobi-Bellman equation. My innovation is to explicitly connect and utilize this relationship. Though these limitations may seem overly simplistic for modeling real capital stocks, I apply ODE theory to address open questions in natural capital valuation and correct existing empirical findings. Each contribution stems from a set of related papers. Fenichel and Abbott (2014) introduced a numerical approach for fundamental natural capital valuations, but their method can fail when the capital stock has multiple equilibria. In my first essay, I present an alternative approach that is robust in such settings. In 2016, Fenichel and Abbott, with coauthors Bayham, Boone, Haacker, and Pfeiffer, used a fundamental natural capital valuation to assess the economic impact of farmers' adoption of efficient irrigation technology. They concluded that this adoption drastically reduced the value of the farmers' groundwater stock due to increased irrigation consumption. In my second essay, I use differential equation theory to demonstrate that a small shock to irrigation consumption could not have caused such a drastic devaluation. The measured devaluation was, in fact, caused by other concurrently changing factors. This causal attribution is an example of the post hoc ergo propter hoc logical fallacy. By holding other factors fixed, the econometrics performed by these authors reveal that the small increase in irrigation consumption (due to efficient irrigation technology) was more than offset by concomitantly increased earnings from crop cultivation, ultimately making groundwater more valuable. This essay's approach only deviates from the prior one by holding other covariates fixed to enable valid, causal conclusions. My third essay reflects on the consequences of an assumption embedded in the original 2016 paper: the authors assumed that crop yield remained constant regardless of the amount of irrigation applied. This assumption should have led to significantly smaller estimates of groundwater value than reported, as the gradient of earnings potential with respect to irrigation—largely driven by increased crop yield—ultimately determines groundwater value. I discovered that this omission was nearly canceled out by an unrelated error in their implementation of the fundamental natural capital valuation. I simultaneously correct both errors, deriving fully justified groundwater valuations and demonstrating that the true effect of adopting efficient irrigation technology was an increase in groundwater value.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Agricultural & Applied Econ

Grantor

University of Illinois Urbana-Champaign

Year dc:date

2025

Author dc:creator

• Larson, Eric

Contributors dc:contributor

• Bullock, David S.
• Mieno, Taro
• Nelson, Charles H
• Brazee, Richard

• Natural Capital
• Environmental Accounts

Statement dc:rights

• Copyright 2025 Eric Larson

Language dc:language

en, eng

Handle dc:identifier

https://hdl.handle.net/2142/129864

OAI record oai:identifier

https://www.ideals.illinois.edu/oai-pmh?verb=GetRecord&metadataPrefix=etdms&identifier=oai%3Awww.ideals.illinois.edu%3A2142%2F129864