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Risk-aversion and the short-run supply of timber

Author

Listed:
  • Gong, Peichen

    () (Department of Forest Economics)

  • Löfgren, Karl-Gustaf Löfgren

    () (Department of Economics, Umeå University)

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.

Suggested Citation

  • Gong, Peichen & Löfgren, Karl-Gustaf Löfgren, 2001. "Risk-aversion and the short-run supply of timber," Umeå Economic Studies 561, Umeå University, Department of Economics.
  • Handle: RePEc:hhs:umnees:0561
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    References listed on IDEAS

    as
    1. Ollikainen, Markku, 1996. "Essays on Timber Supply and Forest Taxation," Research Reports 33, VATT Institute for Economic Research.
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    More about this item

    Keywords

    timber harvesting behavior; uncertainty; portfolio; risk and return.;

    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

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