Risk-Aversion and the Short-Run Supply of Timber
This article examines the effect of risk-aversion on the short-run supply of timber, when the harvest revenue is invested in a portfolio of a riskless and a risky asset. Assuming that the future stumpage price and the rate of return on the risky asset are independent and normally distributed, it is shown that the effect of risk-aversion on the optimal harvesting behavior depends on the sign of a marginal variance function. This shows the effect of a marginal increase in the harvest volume on the variance of the future wealth, evaluated at the optimal harvest-investment decision under risk-neutral preferences. If the marginal variance is negative, then risk-aversion increases harvest in the first-period. If it equals zero, then only high degrees of risk-aversion affect (increase) the harvest. Finally, if the marginal variance is greater than zero, then high degrees of risk-aversion increase the harvest, whereas low degrees of risk-aversion have the opposite effect. The result has implications for the analysis of the harvesting behavior of any renewable resources. FOR. SCI. 49(5):647–656.
Keywords: Price uncertainty; environmental management; forest; forest management; forest resources; forestry; forestry research; forestry science; mean-variance analysis; natural resource management; natural resources; optimal portfolio; timber harvest
Document Type: Miscellaneous
Affiliations: 1: Associate Professor Department of Forest Economics, Swedish University of Agricultural Sciences, Umeå, Sweden, SE-901 83, Phone: +46-90-7866272 Peichen.Gong@sekon.slu.se 2: Professor Department of Economics, Umeå University, Umeå, Sweden, SE-901 87, Phone: +46-90-7865843; Fax: +46-90-772302 Karl-Gustaf.Lofgren@econ.umu.se
Publication date: October 1, 2003
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