On Solving the Multirotational Timber Harvesting Problem with Stochastic Prices: A Linear Complementarity Formulation

Margaret C. Insley () and Kimberly S. Rollins ()

American Journal of Agricultural Economics, 2005, vol. 87, issue 3, pages 735-755

Abstract: This article develops a two-factor real options model of the harvesting decision over infinite rotations assuming a known stochastic price process and using a rigorous Hamilton-Jacobi-Bellman methodology. The harvesting problem is formulated as a linear complementarity problem that is solved numerically using a fully implicit finite difference method. This approach is contrasted with the Markov decision process models commonly used in the literature. The model is used to estimate the value of a representative stand in Ontario's boreal forest, both when there is complete flexibility regarding harvesting time and when regulations dictate the harvesting date. Copyright 2005, Oxford University Press.

Date: 2005
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