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Recursive Preferences in Forest Management

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Abstract:

Expected net present value (ENPV) is a commonly used criterion in optimal forest management; however, this only applies to risk neutrality. If the owner has other risk preferences, then a utility function should be used. Expected utility is the most common way to handle stochasticity in an atemporal framework, but is problematic in intertemporal problems.

Recursive preferences overcome a variety of the difficulties associated with expected utility in stochastic control problems. Recursive preferences (RP) are applied here to forest management. The effects of risk aversion and intertemporal substitution on optimal management are weighed using this framework. Compared to ENPV, RP with empirically plausible levels of intertemporal substitution implies substantially increased harvest levels in the early years, which drastically reduces the stock growth rate. In contrast, risk aversion has little or no impact on optimal management except for an infinite elasticity of intertemporal substitution. In this instance, increasing risk aversion lowers the time to steady-state and the level of steady-state forest stocks. For. Sci. 47(4):455–465.

Keywords: Dynamic programming; environmental management; forest; forest management; forest resources; forestry; forestry research; forestry science; natural resource management; natural resources; risk aversion; substitution

Document Type: Miscellaneous

Affiliations: 1: Researcher Agricultural Economics Research Institute, P.O. Box 3 Helsinki, Finland, 00411, Fax: +358 9 563 1164 jukka.peltola@mttl.fi 2: Professor Department of Environmental Sciences, University of California, Riverside, Riverside, CA, 92521, Phone: (909) 787-4195; Fax: (909) 787-3993 keith.knapp@ucr.edu

Publication date: November 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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