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

Adriana Piazza () and Bernardo Pagnoncelli

Journal of Economics, 2015, vol. 115, issue 2, 175-194

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. Copyright Springer-Verlag Wien 2015

Keywords: Forestry; Dynamic programming; Risk analysis; Coherent risk measures; Q23; C61; D81 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:115:y:2015:i:2:p:175-194

DOI: 10.1007/s00712-014-0414-4

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