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Uncertainty, Debt, and Forest Harvesting: Faustmann Revisited

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Abstract:

Debt is a common feature of forestland ownership, yet it has not been formalized in previous work on uncertainty and forestry decision-making. We extend Faustmann-based price search models by introducing a debt obligation that landowners feel pressure to pay off in finite time. We assume a price arrival process that is more general than in previous search models and allows for multiple unknown offers each period. The motivation for paying off debt could be the high costs of searching for another price offer, costs of renegotiating or refinancing debt, increasing interest charges, or landowner preferences for eliminating debt. The decision problem and associated reservation price strategy depend on a comparison of costs and benefits of waiting to harvest. The timing of debt-payoff date is the critical feature of our model. We show that a debt-payoff date implies a certain path of reservation prices over time and ultimately affects harvesting behavior. The direction and magnitude of effect depends on forest maturity. We also investigate how the reservation price–debt payoff date relationship depends on debt in future rotations, nontimber income, amenity benefits, and single versus infinite rotations. Although these ideas, particularly the inclusion of amenities and nontimber income, are absent from the conventional price search literature, we show they have important effects on the optimal reservation price strategy when landowners feel pressure to pay off debts in finite time. FOR. SCI. 47(2):188–196.

Keywords: Faustmann; dynamic programming; environmental management; forest; forest management; forest resources; forestry; forestry research; forestry science; natural resource management; natural resources; search models; uncertainty

Document Type: Miscellaneous

Affiliations: 1: former Doctoral Student Department of Agricultural and Applied Economics, Virginia Tech 2: Associate Professor Department of Forestry, Virginia Tech, Blacksburg, VA, 24061, Phone: (540) 231-5943 gamacher@vt.edu 3: Associate Professor Department of Forestry, Virginia Tech, Blacksburg, VA, 24061, Phone (540) 231-4356 jsulliv@vt.edu

Publication date: May 1, 2001

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.
    Forest Science is published bimonthly in February, April, June, August, October, and December.

    2015 Impact Factor: 1.702
    Ranking: 16 of 66 in forestry

    Also published by SAF:
    Journal of Forestry
    Other SAF Publications
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