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Taxation and Rotation Age under Stochastic Forest Stand Value

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  • 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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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2004/wp-cesifo-2004-06/cesifo1_wp1211.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1211.

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

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

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References

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  1. Alvarez, Luis H R & Koskela, Erkki, 2003. "On Forest Rotation under Interest Rate Variability," International Tax and Public Finance, Springer, Springer, vol. 10(4), pages 489-503, August.
  2. Reed, William J & Clarke, Harry R, 1990. "Harvest Decisions and Asset Valuation for Biological Resources Exhibiting Size-Dependent Stochastic Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(1), pages 147-69, February.
  3. Gjolberg, Ole & Guttormsen, Atle G., 2002. "Real options in the forest: what if prices are mean-reverting?," Forest Policy and Economics, Elsevier, Elsevier, vol. 4(1), pages 13-20, May.
  4. 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.
  5. Alvarez, Luis H.R. & Koskela, Erkki, 2006. "Does risk aversion accelerate optimal forest rotation under uncertainty?," Journal of Forest Economics, Elsevier, Elsevier, vol. 12(3), pages 171-184, December.
  6. Chang,Fwu-Ranq, 2009. "Stochastic Optimization in Continuous Time," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521541947.
  7. Willassen, Yngve, 1998. "The stochastic rotation problem: A generalization of Faustmann's formula to stochastic forest growth," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 22(4), pages 573-596, April.
  8. Alvarez, Luis H. R. & Koskela, Erkki, 2005. "Wicksellian theory of forest rotation under interest rate variability," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 29(3), pages 529-545, March.
  9. Reed, William J., 1984. "The effects of the risk of fire on the optimal rotation of a forest," Journal of Environmental Economics and Management, Elsevier, vol. 11(2), pages 180-190, June.
  10. Margaret Insley & Kimberly Rollins, 2005. "On Solving the Multirotational Timber Harvesting Problem with Stochastic Prices: A Linear Complementarity Formulation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 87(3), pages 735-755.
  11. 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.
  12. Saphores, Jean-Daniel, 2003. "Harvesting a renewable resource under uncertainty," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(3), pages 509-529, December.
  13. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, Elsevier, vol. 3(4), pages 373-413, December.
  14. Hartman, Richard, 1976. "The Harvesting Decision When a Standing Forest Has Value," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 14(1), pages 52-58, March.
  15. Andrew B. Abel, 1988. "Consumption and Investment," NBER Working Papers 2580, National Bureau of Economic Research, Inc.
  16. Koskela, Erkki & Ollikainen, Markku, 2003. "A Behavioral and Welfare Analysis of Progressive Forest Taxation," Discussion Papers, The Research Institute of the Finnish Economy 862, The Research Institute of the Finnish Economy.
  17. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, American Economic Association, vol. 61(1), pages 65-73, March.
  18. Samuelson, Paul A, 1976. "Economics of Forestry in an Evolving Society," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 14(4), pages 466-92, December.
  19. 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.
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Citations

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Cited by:
  1. Margaret Insley & Tony Wirjanto, 2008. "Contrasting two approaches in real options valuation: contingent claims versus dynamic programming," Working Papers, University of Waterloo, Department of Economics 08002, University of Waterloo, Department of Economics.
  2. Shan chen & Margaret Insley, 2010. "Regime Switching in Stochastic Models of Commodity Prices: An Application to an Optimal Tree Harvesting Problem," Working Papers, University of Waterloo, Department of Economics 1016, University of Waterloo, Department of Economics, revised Jul 2010.
  3. Stéphane Couture & Arnaud Reynaud, 2009. "Forest Management Under Fire Risk When Forest Carbon Sequestration Has Value," LERNA Working Papers, LERNA, University of Toulouse 09.09.285, LERNA, University of Toulouse.
  4. Luis H. R. Alvarez & Erkki Koskela, 2005. "Optimal Harvesting under Resource Stock and Price Uncertainty," CESifo Working Paper Series, CESifo Group Munich 1384, CESifo Group Munich.
  5. Luis H. R. Alvarez & Erkki Koskela, 2005. "Progressive Taxation and Irreversible Investment under Uncertainty," CESifo Working Paper Series, CESifo Group Munich 1377, CESifo Group Munich.

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