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Risk-aversion and the short-run supply of timber

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  • Gong, Peichen

    ()
    (Department of Forest Economics)

  • Löfgren, Karl-Gustaf Löfgren

    ()
    (Department of Economics, Umeå University)

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    Abstract

    This paper examines the effect of risk-aversion on the short-run supply of timber, when the harvest revenue can be invested in a risk-free and a risky asset. It turns out that recognition of the risky investment alternative invalidates the previously reported effect of risk-aversion on short-run timber supply. Assuming that the second-period 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. This shows the effect of a marginal increase in the harvest volume on the variance of the second-period wealth, evaluated at the optimal harvest-investment decision under risk-neutral preferences. If the marginal variance is negative, then risk-aversion increases the first-period harvest volume. If it is equal to zero, then only high degrees of risk-aversion affects (increases) the first-period harvest volume. Finally, if the marginal variance is greater than zero, then high degrees of risk-aversion increases the first-period harvest volume, whereas low degrees of risk-aversion has the opposite effect. The result has implications for the analysis of the harvesting behavior of any renewable resources.

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    Bibliographic Info

    Paper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number 561.

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    Length: 32 pages
    Date of creation: 31 May 2001
    Date of revision:
    Publication status: Published in Forest Science, 2003, pages 647-656.
    Handle: RePEc:hhs:umnees:0561

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    Postal: Department of Economics, Umeå University, S-901 87 Umeå, Sweden
    Phone: 090 - 786 61 42
    Fax: 090 - 77 23 02
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    Web page: http://www.econ.umu.se/
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    Keywords: timber harvesting behavior; uncertainty; portfolio; risk and return.;

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    1. Markku Ollikainen, 1996. "Essays on Timber Supply and Forest Taxation," Research Reports 33, Government Institute for Economic Research Finland (VATT).
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