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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