AN OPTIMIZATION APPROACH TO IDENTIFYING TIMBER SUPPLY FUNCTION COEFFICIENTS

Abstract

This paper examines an optimization approach to identifying short‐run timber supply function coefficients when the form of the supply function is known. By definition, a short‐run timber supply function is a functional relationship between the optimal harvest level in each period (e.g., each year) and the actual forest‐market state in the same period. The short‐run timber supply function represents the optimal harvest decision policy, and therefore, the problem of optimal harvesting can be formulated as a problem of determining this function. When the form of the supply function is known, the problem becomes one of identifying the coefficients of the supply function. If the management objective is to maximize the expected present value of net revenues from timber harvesting over an infinite time horizon, and the timber price process is, in a sense, stationary, the supply function coefficients correspond to the optimal solution to an anticipative optimization problem. In this case, the supply function coefficients can be determined by maximizing the expected present value of the net revenues from timber harvesting, where periodic harvest levels are determined using the supply function. Numerical results show that the short‐run supply functions determined using this approach gives good approximations of the true supply function.