Financial valuation and the optimal rotation of a fully regulated forest

Abstract

This paper demonstrates a new approach to identifying and characterizing the optimal number of age classes in a fully regulated (i.e., normal) forest. We introduce an equilibrium condition for the normal forest requiring that it is financially justified to maintain the steady income forest configuration. We apply two valuation approaches to derive the main conclusion that the Faustmann rotation is the optimal harvest age of a normal forest. Both approaches utilize the standard Fisherian method of asset valuation. The first valuation approach imposes a steady income stream requirement, whereas the second approach is free of such a requirement. The second approach can be interpreted as enforcing market discipline on the normal forest configurations in a competitive equilibrium and picking the only normal forest that can be sustained in competitive equilibrium, namely, the forest with the number of age classes corresponding to the Faustmann rotation age. Our results also highlight an alternative way of deriving and interpreting the so-called zero-profit condition that can be applied to determining the optimal number of age classes in a regulated forest.