The role of economic models in forest management.

Abstract

The review presents an overview of the role of economic models in forest management. After a brief introduction on the use of economic models, the basic Faustmann model and its major applications and extensions are presented. The use of the Faustmann model in timber management is demonstrated using the determination of the rotation time for even-aged forests, the management of uneven-aged forests and the conversion and/or transformation from pure/even-aged, to mixed/uneven-aged forests as examples. The integration of risk into classical economic models is then described. The review highlights how risk in economic models can be expressed either by adding a risk premium to the discount rate or by the application of Monte Carlo simulation techniques. Special attention is being paid to the introduction of the portfolio theory into forest economic models. Stochastic dynamic programming is briefly introduced as well as the integration of the attitude towards risk. The review then gives an overview on principal methods of valuating non-timber forest products. The main direct and indirect methods such as contingent valuation and travel cost are then discussed. The valuation of forest products such as carbon or biodiversity is presented in more detail together with optimization approaches. The review ends with an outlook on an alternative to the standard discounted cash flow used in forest investment analysis: the application of the real options theory and a brief introduction into the application of transaction costs to forestry and the ideas of New Institutional Economics and its application to forestry.