Amenities and Risk in Forest Management

Abstract:     
The objective of the paper is to analyze the risk management behavior of a non-industrial private forest owner under uncertainty about the timber production. Two types of hedging strategies with harvesting decisions are studied: a financial practice versus a physical one. We develop a two-period model of hedging and harvesting decisions when the forest owner values amenity services of forest. We study the properties of optimal current and future harvesting and hedging decisions. We show that, except when both hedging instruments are perfect substitutes, the forest owner chooses a single tool, her/his choice depending on the rate of return of coverage instrument. We also prove that the larger the marginal utility of amenity services, the smaller the harvesting amount. We provide a comparative statics analysis on current and future harvesting and on the hedging strategies. We are interested in the impact of an increase in the initial stocks (wealth and timber), the timber prices (periods 1 and 2), the opportunity costs of the hedging instruments (rate of return for savings and cost of the regeneration process for physical practice) and the expected risk. We show, for example, that an increase in the expected risk has a negative impact on period 1 harvesting and the use of hedging tool for both coverage strategies, while the impact on period 2 harvesting is positive for savings and null for physical practice.

Number of Pages in PDF File: 37

Keywords: amenities, risk, forest management, hedging strategies, harvesting

JEL Classification: D81, Q23, Q26, Q54

working papers series