Impact of Risk Aversion on Optimal Rotation Age

Peichen Gong () and Löfgren, Karl-Gustaf ()
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Peichen Gong: Department of Forest Economics, Swedish University of Agricultural Sciences
Löfgren, Karl-Gustaf: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden

No 666, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: This paper examines the effect of risk aversion on the optimal rotation age when the stumpage price is stochastic. Using a mean-variance approach, we show that the optimal rotation age under risk aversion may be lower than, equal to, or higher than the corresponding optimal rotation age under risk neutrality. Which of these cases holds true depends on the real (or relative) regeneration cost and the interest rate, and can be determined based on the marginal variance (the derivative of the variance function with respect to rotation age) evaluated at the optimal rotation age under risk neutrality. Furthermore, we show that there exists a monotone continuous curve which divides the regeneration cost-interest rate space into two regions where risk aversion affects the optimal rotation differently. For a given interest rate, risk aversion shortens the optimal rotation if the regeneration cost lies below the curve, while it prolongs the optimal rotation if the opposite holds. Along the separating curve, the optimal rotation age under risk aversion coincides with the optimal rotation age under risk neutrality. Two examples are presented to demonstrate the separating curve and to show how the degree of risk aversion affects the optimal decision.

Keywords: Even-aged stand management; price uncertainty; mean-variance approach; open-loop control. (search for similar items in EconPapers)
JEL-codes: D81 Q23 (search for similar items in EconPapers)
Date: 2005-10-06
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