Abstract
The decision to harvest or conserve old-growth forest is formulated as a stochastic decision problem in continuous time. Uncertainty in future amenity values for standing forest and in future timber revenues for harvested forest are included in the model, along with the risk of catastrophic destruction by fire, pest infestation, etc. It is shown how the decision problem can be expressed as an optimal stopping problem which can be solved analytically. The optimal decision rule is shown to depend on how the ratio of current timber value to the current expected present value of amenity benefits foregone through harvesting compares with some critical level. The effects of changes in uncertainty and other parameters on the optimal rule are discussed. Also it is shown how the cost-benefit analysis and certainty-equivalence procedures lead to premature harvesting, and the expected loss in survival time for these sub-optimal procedures is calculated.
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