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On Solving the Multirotational Timber Harvesting Problem with Stochastic Prices: A Linear Complementarity Formulation

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  • Margaret Insley
  • Kimberly Rollins

Abstract

This article develops a two-factor real options model of the harvesting decision over infinite rotations assuming a known stochastic price process and using a rigorous Hamilton-Jacobi-Bellman methodology. The harvesting problem is formulated as a linear complementarity problem that is solved numerically using a fully implicit finite difference method. This approach is contrasted with the Markov decision process models commonly used in the literature. The model is used to estimate the value of a representative stand in Ontario's boreal forest, both when there is complete flexibility regarding harvesting time and when regulations dictate the harvesting date. Copyright 2005, Oxford University Press.

Suggested Citation

  • 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, vol. 87(3), pages 735-755.
    • Handle: RePEc:oup:ajagec:v:87:y:2005:i:3:p:735-755
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    File URL: http://hdl.handle.net/10.1111/j.1467-8276.2005.00759.x
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