Amenities and Risk in Forest Managemen
The objective of the paper is to analyze the risk management behavior of a non-industrial private forest owner under uncertainty about timber production. Two types of hedging strategies with harvesting decisions are studied: a financial practice versus a physical one. We develop a two-period model of hedging and harvesting decisions when the forest owner values the amenity services of forest. We study the properties of optimal current and future harvesting and hedging decisions. We show that, except when both hedging instruments are perfect substitutes, the forest owner chooses a single tool, her/his choice depending on the rate of return of the hedging instrument. We also prove that the greater the marginal utility of amenity services, the smaller the harvesting amount. We provide a comparative statics analysis on current and future harvesting and on the hedging strategies. We are interested in the impact of an increase in initial stocks (wealth and timber), timber prices (periods 1 and 2), opportunity costs of the hedging instruments (rate of return for savings and cost of the regeneration process for physical practice) and expected risk. We show, for example, that an increase in expected risk has a negative impact on period 1 harvesting and the use of hedging tools for both strategies, while the impact on period 2 harvesting is positive for savings and null for physical practice.
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- Luis H. R. Alvarez & Erkki Koskela, 2001.
"Wicksellian Theory of Forest Rotation under Interest Rate Variability,"
CESifo Working Paper Series
606, CESifo Group Munich.
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- Alvarez, Luis H R & Koskela, Erkki, 2003.
"On Forest Rotation under Interest Rate Variability,"
International Tax and Public Finance,
Springer, vol. 10(4), pages 489-503, August.
- Alvarez, Luis H.R. & Koskela, Erkki, 2003. "On Forest Rotation Under Interest Rate Variability," Discussion Papers 840, The Research Institute of the Finnish Economy.
- Max, Wendy & Lehman, Dale E., 1988. "A behavioral model of timber supply," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 71-86, March.
- ERKKI Koskela & MARKKU Ollikainen, 1997. "Optimal Design of Forest Taxation with Multiple-Use Characteristics of Forest Stands," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 10(1), pages 41-62, July.
- Alvarez, Luis H.R. & Koskela, Erkki, 2006.
"Does risk aversion accelerate optimal forest rotation under uncertainty?,"
Journal of Forest Economics,
Elsevier, vol. 12(3), pages 171-184, December.
- Luis H. R. Alvarez & Erkki Koskela, 2004. "Does Risk Aversion Accelerate Optimal Forest Rotation under Uncertainty?," CESifo Working Paper Series 1285, CESifo Group Munich.
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