Abstract
The objective of the paper is to analyze the risk management behavior of a non-industrial private forest owner under uncertainty about 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 the 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 the hedging instrument. We also prove that the greater 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 initial stocks (wealth and timber), timber prices (periods 1 and 2), opportunity costs of the hedging instruments (rate of return for savings and cost of the regeneration process for physical practice) and expected risk. We show, for example, that an increase in expected risk has a negative impact on period 1 harvesting and the use of hedging tools for both strategies, while the impact on period 2 harvesting is positive for savings and null for physical practice.
Highlights
In many countries of Europe, forests are managed by small Non-Industrial Private Forest (NIPF) owners with some specific characteristics that have an impact on forest management
How do hedging strategies affect the allocation of forests to harvesting and amenity service purposes? Second, should NIPF owners use both practices simultaneously? Third, are these differences in harvesting and consumption-savings behavior dependent on the hedging strategies selected by the forest owner? Fourth, what are the qualitative properties of timber supply and hedging strategies when amenity services have private value? In this paper, we provide some answers to these questions
We will assume that u is increasing and concave (u′ > 0, u′′ < 0), while v satisfies v′ = m =constant> 0. This last assumption10 seems of specific concern here, since we introduce only pure individual amenities, and not collective ones: the forest owner has the opportunity to enjoy the existence of amenity services provided by the forest, without incurring a congestion externality effect as in the case of collective use of forest
Summary
In many countries of Europe, forests are managed by small Non-Industrial Private Forest (NIPF) owners with some specific characteristics that have an impact on forest management. The two-period model of consumption and savings offers a natural way of incorporating uncertainty and risk preferences using the expected utility framework It facilitates the analysis of interaction between non-timber benefits and timber ones, and implications in optimal decisions. While the effect of risk on timber supply has been studied in previous works using the two-period model ([18] ; [19]), the joint problems of smoothing consumption over time and managing a forest that simultaneously produces timber and amenities under risk have been relatively little analyzed.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
