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Impact of Risk Aversion on Optimal Rotation Age

Author

Listed:
  • Gong, Peichen

    (Department of Forest Economics, Swedish University of Agricultural Sciences)

  • Löfgren, Karl-Gustaf

    (Department of Economics, Umeå University)

Abstract

This paper examines the effect of risk aversion on the optimal rotation age when the stumpage price is stochastic. Using a mean-variance approach, we show that the optimal rotation age under risk aversion may be lower than, equal to, or higher than the corresponding optimal rotation age under risk neutrality. Which of these cases holds true depends on the real (or relative) regeneration cost and the interest rate, and can be determined based on the marginal variance (the derivative of the variance function with respect to rotation age) evaluated at the optimal rotation age under risk neutrality. Furthermore, we show that there exists a monotone continuous curve which divides the regeneration cost-interest rate space into two regions where risk aversion affects the optimal rotation differently. For a given interest rate, risk aversion shortens the optimal rotation if the regeneration cost lies below the curve, while it prolongs the optimal rotation if the opposite holds. Along the separating curve, the optimal rotation age under risk aversion coincides with the optimal rotation age under risk neutrality. Two examples are presented to demonstrate the separating curve and to show how the degree of risk aversion affects the optimal decision.

Suggested Citation

  • Gong, Peichen & Löfgren, Karl-Gustaf, 2005. "Impact of Risk Aversion on Optimal Rotation Age," Umeå Economic Studies 666, Umeå University, Department of Economics.
    • Handle: RePEc:hhs:umnees:0666
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    References listed on IDEAS

    as
    1. Miller, Robert A. & Voltaire, Karl, 1983. "A stochastic analysis of the tree paradigm," Journal of Economic Dynamics and Control, Elsevier, vol. 6(1), pages 371-386, September.
    2. Michael Scorgie & John Kennedy, 1996. "Who Discovered the Faustmann Condition?," History of Political Economy, Duke University Press, vol. 28(1), pages 77-80, Spring.
    3. Reed, William J., 1984. "The effects of the risk of fire on the optimal rotation of a forest," Journal of Environmental Economics and Management, Elsevier, vol. 11(2), pages 180-190, June.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Patrice Loisel & Marielle Brunette & Stéphane Couture, 2020. "Insurance and Forest Rotation Decisions Under Storm Risk," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 76(2), pages 347-367, July.
    2. Couture, Stéphane & Reynaud, Arnaud, 2011. "Forest management under fire risk when forest carbon sequestration has value," Ecological Economics, Elsevier, vol. 70(11), pages 2002-2011, September.

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    More about this item

    Keywords

    Even-aged stand management; price uncertainty; mean-variance approach; open-loop control.;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • Q23 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Forestry

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