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Risk Preferences and Adaptive Harvest Policies for Even-Aged Stand Management

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Abstract:

Uncertainty in future states of nature affects the set of feasible management alternatives as well as a forest owner's preferences among different alternatives. To incorporate uncertainty into forestry decisions, both effects should be recognized simultaneously. This study concerns the final harvest decision in even-aged stand management with stochastic stumpage prices. An expected utility maximization model is developed for determining the optimal adaptive harvest policy. Instead of assuming risk-neutrality on the side of forest owners, the model explicitly incorporates risk preferences into the determination of reservation prices. A method for estimating the set of efficient adaptive harvest policies for risk-averse forest owners is developed based on the mean-variance rule and stochastic dominance analysis. The set of efficient adaptive harvest policies is estimated and compared with the set of efficient rotation ages for two example stands. Numerical results show that any risk-averse forest owner prefers the optimal adaptive harvest policy to the optimal rotation age. By using the rule of "harvest only when the observed stumpage price is equal to or higher than the reservation price," the expected net present value can be increased, and, meanwhile, the standard deviation of the net present value can be reduced significantly. Incorporation of risk-aversion leads to reservation prices that may be lower than those that maximize the expected net present value. It indicates that risk-averse forest owners typically should harvest earlier than risk-neutral forest owners. For. Sci. 44(4):496-506.

Keywords: Forest management; rotation age; stochastic dominance analysis; uncertainty

Document Type: Journal Article

Affiliations: Assistent Professor, Department of Forest Economics, Swedish University of Agricultural Sciences, S-90183 UmeƄ, Sweden Phone (+46)-90-7866272;, Fax: (+46)-90-7866073

Publication date: November 1, 1998

More about this publication?
  • Forest Science is a peer-reviewed journal publishing fundamental and applied research that explores all aspects of natural and social sciences as they apply to the function and management of the forested ecosystems of the world. Topics include silviculture, forest management, biometrics, economics, entomology & pathology, fire & fuels management, forest ecology, genetics & tree improvement, geospatial technologies, harvesting & utilization, landscape ecology, operations research, forest policy, physiology, recreation, social sciences, soils & hydrology, and wildlife management.
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