Scandinavian Working Papers in Economics
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Department of Economics, Umeå University Umeå Economic Studies, Department of Economics, Umeå University

No 561:
Risk-aversion and the short-run supply of timber

Peichen Gong () and Karl-Gustaf Löfgren Löfgren ()

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.; (follow links to similar papers)

JEL-Codes: 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 Karl-Gustaf Löfgren Löfgren, (2003), 'Risk-aversion and the short-run supply of timber', Forest Science, Vol. 49, October, pages 647-656

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