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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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    References listed on IDEAS

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    5. Oates, Wallace E. & Schwab, Robert M., 1997. "The Impact of Urban Land Taxation: The Pittsburgh Experience," National Tax Journal, National Tax Association, pages 1-21.
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    7. Cho, Seong-Hoon & Newman, David H., 2005. "Spatial analysis of rural land development," Forest Policy and Economics, Elsevier, pages 732-744.
    8. Lyytikäinen, Teemu, 2009. "Three-rate property taxation and housing construction," Journal of Urban Economics, Elsevier, pages 305-313.
    9. Glaeser, Edward L., 2008. "Cities, Agglomeration, and Spatial Equilibrium," OUP Catalogue, Oxford University Press, number 9780199290444.
    10. Alfonso Flores‐Lagunes & Kurt Erik Schnier, 2012. "Estimation of sample selection models with spatial dependence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 27(2), pages 173-204, March.
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    12. Jan K. Brueckner, 2003. "Strategic Interaction Among Governments: An Overview of Empirical Studies," International Regional Science Review, , pages 175-188.
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