Endangered aquifers: Groundwater management under threats of catastrophic events

We study optimal management of groundwater resources under risk of occurrence of undesirable events. The analysis is carried out within a unified framework, accommodating various types of events that differ in the source of uncertainty regarding their occurrence conditions and in the damage they inflict. Characterizing the optimal policy for each type, we find that the presence of event uncertainty has profound effects. In some cases the isolated steady states, characterizing the optimal exploitation policies of many renewable resource problems, become equilibrium intervals. Other situations support isolated equilibria, but the degree of prudence they imply is sensitive to the nature of the event risk.