The decision to conserve or harvest old-growth forest

Date

2010-01-07T00:22:41Z

Authors

Reed, William

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Abstract

The decision as to whether to harvest or conserve old-growth forest is formulated as a stochastic decision problem in continuous time. Uncertainty in future amenity values for standing forest and in future timber revenues for harvested forest are included in the model, along with the risk of catastrophic destruction by fire, pest infestation, etc. It is shown how the decision problem can be expressed as an optimal stopping problem for Brownian motion processes, and the optimal decision rule is shown to depend on how the ratio of current timber value to amenity benefit flow compares with some critical level. The effects of changes in uncertainty and other parameters on the optimal rule are discussed. Also it is shown how the cost-benefit analysis and certainty-equivalence procedures lead to premature harvesting. The expected survival time of the forest using the optimal decision rule and other sub-optimal rules is discussed.

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Keywords

amenity values, conservation, uncertainty, catastrophic risk, optimal stopping, geometric Brownian motion, expected survival time

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