Recursive Preferences in Forest Management

Abstract

Abstract Expected net present value (ENPV) is a commonly used criterion in optimal forest management; however, this only applies to risk neutrality. If the owner has other risk preferences, then a utility function should be used. Expected utility is the most common way to handle stochasticity in an atemporal framework, but is problematic in intertemporal problems.Recursive preferences overcome a variety of the difficulties associated with expected utility in stochastic control problems. Recursive preferences (RP) are applied here to forest management. The effects of risk aversion and intertemporal substitution on optimal management are weighed using this framework. Compared to ENPV, RP with empirically plausible levels of intertemporal substitution implies substantially increased harvest levels in the early years, which drastically reduces the stock growth rate. In contrast, risk aversion has little or no impact on optimal management except for an infinite elasticity of intertemporal substitution. In this instance, increasing risk aversion lowers the time to steady-state and the level of steady-state forest stocks. For. Sci. 47(4):455–465.