Risk-aversion and the short-run supply of timber
AbstractThis 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 InfoPaper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number 561.
Length: 32 pages
Date of creation: 31 May 2001
Date of revision:
Publication status: Published in Forest Science, 2003, pages 647-656.
Contact details of provider:
Postal: Department of Economics, Umeå University, S-901 87 Umeå, Sweden
Phone: 090 - 786 61 42
Fax: 090 - 77 23 02
Web page: http://www.econ.umu.se/
More information through EDIRC
timber harvesting behavior; uncertainty; portfolio; risk and return.;
Find related papers by JEL classification:
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
- Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
This paper has been announced in the following NEP Reports:
- NEP-AGR-2001-06-08 (Agricultural Economics)
- NEP-ALL-2001-06-08 (All new papers)
- NEP-IAS-2001-06-08 (Insurance Economics)
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.:
- Markku Ollikainen, 1996. "Essays on Timber Supply and Forest Taxation," Research Reports 33, Government Institute for Economic Research Finland (VATT).
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