Challenging the assumptions of a standard model: How historical triggers in terms of technical innovations, labor costs and timber price change the land expectation value

Abstract

The objective of this study is to examine and demonstrate how the land expectation value (LEV) by Faustmann changes due to the dynamic development in timber harvesting technology, labor costs and timber prices based on historical data of the last century. With this approach, we challenge Faustmann's assumption of stable conditions saying that the current situation of costs, prices and yield will stay constant for an infinite time in the future. This paper outlines the historical triggers of forest harvesting operations, i.e. the introduction of the one-man chainsaw and harvester and forwarder based fully mechanized timber harvesting systems between the early 20th century and the early 21st century using the example of German forestry. Furthermore, we analyze and discuss productivity changes due to technical innovations also in the context of labor costs and timber price changes. We show that technical innovations are not the major determinant of the LEV because significantly increasing labor costs are an opposing factor on efficiency gains due to technical productivity. Moreover, we discover that timber price developments originally assumed as marginal condition have the biggest effect on the LEV throughout the last century. As a result, we sensitize for the issue that Faustmann's assumption of stable conditions does not satisfy the peculiarities of a continuously developing forest economy.