Journal of Economics

, Volume 115, Issue 2, pp 175–194

The stochastic Mitra–Wan forestry model: risk neutral and risk averse cases

Article

DOI: 10.1007/s00712-014-0414-4

Cite this article as:
Piazza, A. & Pagnoncelli, B.K. J Econ (2015) 115: 175. doi:10.1007/s00712-014-0414-4

Abstract

We extend the classic Mitra and Wan forestry model by assuming that prices follow a geometric Brownian motion. We move one step further in the model with stochastic prices and include risk aversion in the objective function. We prove that, as in the deterministic case, the optimal program is periodic both in the risk neutral and risk averse frameworks, when the benefit function is linear. We find the optimal rotation ages in both stochastic cases and show that they may differ significantly from the deterministic rotation age. In addition, we show how the drift of the price process affects the optimal rotation age and how the degree of risk aversion shortens it. We illustrate our findings for an example of a biomass function and for different values of the model’s parameters.

Keywords

Forestry Dynamic programming Risk analysis  Coherent risk measures 

JEL Classification

Q23 C61 D81 

Copyright information

© Springer-Verlag Wien 2014

Authors and Affiliations

  1. 1.Departamento de MatemáticaUniversidad Técnica Federico Santa MaríaValparaísoChile
  2. 2.Escuela de NegociosUniversidad Adolfo IbáñezPeñalolénChile

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