Umeå Economic Studies, Department of Economics, Umeå University
No 561:
Riskaversion and the shortrun supply of timber
Peichen Gong ()
and KarlGustaf Löfgren Löfgren ()
Abstract: This paper examines the effect of riskaversion on the
shortrun supply of timber, when the harvest revenue can be invested in a
riskfree and a risky asset. It turns out that recognition of the risky
investment alternative invalidates the previously reported effect of
riskaversion on shortrun timber supply. Assuming that the secondperiod
stumpage price and the rate of return on the risky asset are independent
and normally distributed, it is shown that the effect of riskaversion 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 secondperiod wealth, evaluated at the optimal
harvestinvestment decision under riskneutral preferences. If the marginal
variance is negative, then riskaversion increases the firstperiod harvest
volume. If it is equal to zero, then only high degrees of riskaversion
affects (increases) the firstperiod harvest volume. Finally, if the
marginal variance is greater than zero, then high degrees of riskaversion
increases the firstperiod harvest volume, whereas low degrees of
riskaversion 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.; (follow links to similar papers)
JELCodes: D21; Q11; Q12; (follow links to similar papers)
32 pages, May 31, 2001
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 This paper is published as:

Gong, Peichen and KarlGustaf Löfgren Löfgren, (2003), 'Riskaversion and the shortrun supply of timber', Forest Science, Vol. 49, October, pages 647656
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