Risk Management Behavior of a Forest Owner to Address Growth Risk

Abstract

We analyze risk management behavior (financial savings versus physical savings) of a private forest owner who values amenities in relation to uncertainty about timber growth. In a two-period model, we study the properties of optimal current and future harvesting and risk management decisions. We show that the forest owner chooses the tool with the highest rate of return unless both risk management instruments are perfect substitutes. We prove that future harvesting is greater under physical savings than under financial savings. Comparative static results on amenity preferences, incomes, forest stocks, timber prices, and opportunity costs are investigated.