Theoretical Reserve Price in Forestry

Abstract

This article uses the forest management problem under uncertainty to derive the optimal reservation price when a standing timber is to be auctioned. Theoretically, the resulting optimal reservation price that considers the harvesting decision is an extended version of Laffont and Maskin's and Riley and Samuelson's reservation price, which is suboptimal in the forestry context.

Empirical Reserve Price in Forestry: Application to US Forest Service

“…For Lodgepole pine and Douglas fir, the optimal reservation price is on average 91% and 117.9% respectively, higher than that set by the USFS. Table 4 also confirms the theoretical results of [3] that the model optimal reserve price derived is higher than that of LMRS. The difference in percentage for Lodgepole pine and Douglas fir is on average 13.1% and 10.9% respectively.…”

“…The parameters K and r are the planting cost and the interest rate respectively. For the empirical analysis I summarize here the solution of the problem provided by [3] which will be used to estimate the model parameters and to calculate the optimal reservation price. These consist of the optimal cutting age of trees defined by Equation 3 where δ satisfies Equation 4.…”

“…Over the past decades, empirical works have derived the reservation in forestry under various assumptions using the well known result of [1] [2]. However, in a recent theoretical paper, [3] showed that this result is not suitable for the forest management problem to estimate an optimal reservation in forestry because it ignores the harvesting decision. Therefore, he proposed an optimal reservation price that endogenizes the harvesting decision by assuming that bidders' valuations depend on the optimal harvest time of trees namely, the optimal rotation uncertain and then to analyse to what extent the result differs from that of [1] [2] in term of the forest owner's profit.…”