Risk-aversion and the short-run supply of timber

Author

Peichen Gong (peichen.gong@sekon.slu.se) and Karl-Gustaf Löfgren Löfgren (karl-gustaf.lofgren@econ.umu.se)
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No 561, Umeå Economic Studies from  Umeå University, Department of Economics

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.

Keywords: timber harvesting behavior; uncertainty; portfolio; risk and return. (search for similar items in EconPapers)
JEL-codes: D21 Q11 Q12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-agrand nep-ias
Date: 2001-05-31
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Published in Forest Science, 2003, pages 647-656.

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Persistent link:http://EconPapers.repec.org/RePEc:hhs:umnees:0561

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