Insurance and Risk-Reducing Activity in Forestry: A Theoretical Approach

Revue d'Études en Agriculture et Environnement (Review of Agricultural and Environmental Studies), Vol. 86, pp. 57-78, 2008

22 Pages Posted: 5 May 2011

Date Written: January 1, 2008

Abstract

This article presents a theoretical model of private forest owner’s prevention and insurance choice in presence of natural risk. In France, evidence shows that non-industrial private forest owners rarely invest in prevention or insurance activities to reduce possible damages caused by natural risks. A natural risk in forest is represented by an infinite number of states of nature and is characterised by a loss function proportional to the forest value. We define optimal forest risk-reducing activities and insurance activities. We find some comparative static results and we analyse the impact of public financial assistance after a natural catastrophe on the forest owner’s decision. We show that a higher stand value has generally an ambiguous effect on risk-reducing activity. Indeed, this impact depends on three effects: the risk, wealth and loss effects and the net effect may be ambiguous. We show that the impact of an increase in the risk-reducing activity cost on optimal risk-reducing activity depends on the attitudes toward risk and on the relationship between the marginal return of risk-reducing activities and the random severity of a natural disaster. We prove that, if prevention activities are risk-reducing (risky) investment, then more risk-averse forest owners use more (less) risk-reducing activities. Providing public financial assistance after a natural catastrophe may reduce the incentives of non-industrial private forest owners to invest in insurance and forest risk management activities.

Keywords: insurance, risk-reducing activities, public intervention, forest

JEL Classification: D81, G22, Q23

Suggested Citation

Marielle, Brunette and Couture, Stephane, Insurance and Risk-Reducing Activity in Forestry: A Theoretical Approach (January 1, 2008). Revue d'Études en Agriculture et Environnement (Review of Agricultural and Environmental Studies), Vol. 86, pp. 57-78, 2008 , Available at SSRN: https://ssrn.com/abstract=1800542

Brunette Marielle (Contact Author)

LEF-ENGREF-INRA ( email )

14 rue Girardet
Nancy, 54042
France

Stephane Couture

ESR-INRA

Chemin de Borde-Rouge
Auzeville B.P. 27
Castanet-Tolosan Cedex, 31326
France

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