A mean-variance approach to short-term timber selling and forest taxation under multiple sources of uncertainty

Abstract

The effects of forest taxation on timber supply under the double uncertainty of real interest rate and future timber price are analyzed in a mean-variance framework. If future timber price and interest rate are independent random variables, there exists an asymmetry between lenders and borrowers, as there is in the single interest rate uncertainty case. Borrowers cut more and lenders cut less as a response to double uncertainty relative to single price uncertainty. If timber price and interest rate are correlated, the sign of the covariance is crucial for the interpretation of the optimality conditions and for the comparative static analysis results. If covariance is negative, borrowers still tend to increase their cutting, but the behaviour of lenders depends on the relative magnitudes of risks associated with interest rate and timber price, which is indicated by variances and covariance. Finnish data are used to evaluate the size of various risks and the sign of covariance. The evidence suggests that a statistically insignificant negative correlation exists and that the covariance is zero.

Risks, Information and Short-Run Timber Supply

“…An important caveat is in order here: the present model follows a well-established direction in the existing literature [4][5][6][7][8][9][10] in focusing on the inter-temporal wood supply problem, namely how forest-owners decide between "harvesting today" and "harvesting tomorrow". This of course implies that other important aspects (e.g.…”

“…Using the Fisherian two-period consumption-saving-harvesting model, optimal timber harvesting under uncertainty has been extensively investigated [4][5][6][7][8][9][10]. That risk-averse landowners respond differently to uncertainty than risk-neutral ones has been established in a number of studies [11][12][13][14].…”

“…This result is confirmed in Koskela [5], who considers a more complex landowner's maximization problem, wherein optimal harvesting and consumption-saving decisions are derived under uncertain timber prices, and capital markets are characterized by a deterministic interest rate. The set of the available investment opportunities is further developed in Ollikainen [7,8], where optimal harvest decisions are derived under the possibility of (harvest) revenues investment in a risky asset. In particular, the authors of [8] extend what is claimed in [7], by assuming a stochastic future timber price.…”

“…The set of the available investment opportunities is further developed in Ollikainen [7,8], where optimal harvest decisions are derived under the possibility of (harvest) revenues investment in a risky asset. In particular, the authors of [8] extend what is claimed in [7], by assuming a stochastic future timber price.…”

“…The analysis of Ollikainen [8] shows that the behavior of risk-averse and risk-neutral forest owners differ depending on the position assumed on capital markets (borrowers or lenders), and the sign of the correlation between the interest rate and future timber price. Gong and Löfgren [10] bring further understanding of the problem by considering a richer set of investment possibilities that includes both a risky and a riskless asset, while still maintaining uncertainty on future timber price.…”