A General Approach to the Stochastic Rotation Problem with Amenity Valuation

32 Pages Posted: 3 Mar 2003

See all articles by Luis Hernan Radomiro Alvarez

Luis Hernan Radomiro Alvarez

University of Turku - Turku School of Economics

Erkki Koskela

University of Helsinki - Department of Political and Economic Studies; CESifo (Center for Economic Studies and Ifo Institute); Bank of Finland - Research Department; IZA Institute of Labor Economics

Date Written: February 2003

Abstract

This paper presents a new approach to study the optimal rotation policy with amenity valuation under uncertainty. We first postulate the stochastic forest value and assume plausibly that monetary value of amenities is a continuous and non-negative function of forest value thus presenting the trade-off between timber revenues and amenity values. Second, instead of using a dynamic programming approach, we derive a recursive representation of the total forest value and solve the optimal rotation threshold by applying ordinary non-linear programming techniques. Third, we characterize under certain set of conditions how the properties of both the expected cumulative value and the expected marginal cumulative value, accrued from amenity services, depend on the precise nature of the monetary valuation of amenities and what is the impact of volatility on these concepts. Finally, we illustrate our results explicitly in models based on logistic growth by focusing on the role of amenity valuation and volatility of forest value in the determination of Wicksellian and Faustmannian thresholds. Our theoretical and numerical findings emphasize the crucial importance of the nature of amenity valuation for the impact of higher volatility of forest value on the rotation thresholds.

Keywords: Amenity Valuation, Optimal Faustmannian and Wicksellian Rotation Policy, Stochastic Impulse Control

JEL Classification: Q23, G26, C61

Suggested Citation

Radomiro Alvarez E., Luis Hernan and Koskela, Erkki, A General Approach to the Stochastic Rotation Problem with Amenity Valuation (February 2003). CESifo Working Paper Series No. 857. Available at SSRN: https://ssrn.com/abstract=382946

Luis Hernan Radomiro Alvarez E.

University of Turku - Turku School of Economics ( email )

Rehtorinpellonkat 3
FIN-20500 Turku
Finland

Erkki Koskela (Contact Author)

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland
+358 9 191 8894 (Phone)
+358 9 191 8877 (Fax)

HOME PAGE: http://www.cesifo.de/servlet/page?_pageid=56&_dad=portal30&_schema=PORTAL30&pa_id=7298

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Bank of Finland - Research Department ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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