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Taxation and Rotation Age under Stochastic Forest Stand Value

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Author Info
Luis H. R. Alvarez ()
Erkki Koskela ()
Abstract

The paper uses both the single rotation and ongoing rotation framework to study the impact of yield tax, lump-sum tax, cash flow tax and tax on interest rate earnings on the privately optimal rotation period when forest value growth is stochastic and forest owners are either risk neutral or risk averse. In the case of risk-neutral forest owner higher yield tax raises the optimal harvesting threshold and thereby prolongs the expected rotation period. The same qualitative result holds for lump-sum tax and for the tax on interest rate earnings, while the cash flow tax is neutral. Under risk aversion the optimal harvesting threshold is lower and the expected rotation period shorter than under risk neutrality both in the single and ongoing rotation cases. Comparative statics of taxes are similar as under risk neutrality with the exception of cash flow tax, which may not be neutral anymore. Numerical results indicate that the optimal harvesting threshold both as a function of the yield tax and the forest value volatility increases more rapidly under risk neutrality than under risk aversion.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 1211.

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Date of creation: 2004
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Handle: RePEc:ces:ceswps:_1211

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Related research
Keywords: optimal rotation; taxation; stochastic forest value; risk aversion;

Other versions of this item:

Find related papers by JEL classification:
C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Statistical Decision Theory; Operations Research
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
Q23 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Forestry

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Andrew B. Abel, 1988. "Consumption and Investment," NBER Working Papers 2580, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Alvarez, Luis H R & Koskela, Erkki, 2003. "On Forest Rotation under Interest Rate Variability," International Tax and Public Finance, Springer, vol. 10(4), pages 489-503, August. [Downloadable!] (restricted)
  3. Koskela, Erkki & Ollikainen, Markku, 2001. "Forest Taxation and Rotation Age under Private Amenity Valuation: New Results," Journal of Environmental Economics and Management, Elsevier, vol. 42(3), pages 374-384, November. [Downloadable!] (restricted)
  4. Erkki Koskela & Markku Ollikainen, 2003. "A Behavioral and Welfare Analysis of Progressive Forest Taxation," Discussion Papers 862, The Research Institute of the Finnish Economy. [Downloadable!]
  5. Englin, Jeffrey E. & Klan, Mark S., 1990. "Optimal taxation: Timber and externalities," Journal of Environmental Economics and Management, Elsevier, vol. 18(3), pages 263-275, May. [Downloadable!] (restricted)
  6. Insley, Margaret, 2002. "A Real Options Approach to the Valuation of a Forestry Investment," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 471-492, November. [Downloadable!] (restricted)
  7. Gjolberg, Ole & Guttormsen, Atle G., 2002. "Real options in the forest: what if prices are mean-reverting?," Forest Policy and Economics, Elsevier, vol. 4(1), pages 13-20, May. [Downloadable!] (restricted)
  8. Hartman, Richard, 1976. "The Harvesting Decision When a Standing Forest Has Value," Economic Inquiry, Oxford University Press, vol. 14(1), pages 52-58, March.
  9. Luis H.R. Alvarez & Erkki Koskela, 2003. "On Forest Rotation Under Interest Rate Variability," Discussion Papers 840, The Research Institute of the Finnish Economy. [Downloadable!]
  10. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December. [Downloadable!] (restricted)
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  11. Samuelson, Paul A, 1976. "Economics of Forestry in an Evolving Society," Economic Inquiry, Oxford University Press, vol. 14(4), pages 466-92, December.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Luis H. R. Alvarez & Erkki Koskela, 2005. "Optimal Harvesting under Resource Stock and Price Uncertainty," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. Luis H. R. Alvarez & Erkki Koskela, 2005. "Progressive Taxation and Irreversible Investment under Uncertainty," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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