The effects of factor supply assumptions on intertemporal timber supply behavior: the cases of investable funds and land

Abstract

Intertemporal timber supply models typically assume perfect capital markets and perfectly inelastic supplies of land. Using a dynamic model of U.S. timber and agriculture markets, we examine (i) borrowing limits or capital constraints, in which investment in forest management on nonindustrial private ownerships is restricted, and (ii) a nonzero elasticity of land supply. Results suggest that alternative treatments of supply conditions for these factors influence the flexibility of the simulated market system to adapt to changes over time and across policy scenarios. Supply restrictions limit adjustment options in management activities and force greater change in other endogenous elements such as price and consumption. Implications drawn from any policy analyses also differ with input supply assumptions. Policy impacts were found to be largely transitory in the cases without investment limits and essentially permanent when limits exist. Recognizing a price-sensitive land supply, at least as this process is represented in the present model, partially compensates for the imposition of borrowing restrictions, moving projections closer to behavior observed in the perfect capital market cases. Access to additional land as potential afforestation investments provides additional private investment flexibility. Typically, however, this linkage is neither explicit nor endogenous in forest sector models.