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On Solving the Multirotational Timber Harvesting Problem with Stochastic Prices: A Linear Complementarity Formulation
Author(s) -
Insley Margaret,
Rollins Kimberly
Publication year - 2005
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1111/j.1467-8276.2005.00759.x
Subject(s) - complementarity (molecular biology) , linear complementarity problem , mathematical optimization , markov decision process , flexibility (engineering) , bellman equation , markov process , mathematics , computer science , mathematical economics , nonlinear system , statistics , genetics , physics , quantum mechanics , biology
This article develops a two‐factor real options model of the harvesting decision over infinite rotations assuming a known stochastic price process and using a rigorous Hamilton‐Jacobi‐Bellman methodology. The harvesting problem is formulated as a linear complementarity problem that is solved numerically using a fully implicit finite difference method. This approach is contrasted with the Markov decision process models commonly used in the literature. The model is used to estimate the value of a representative stand in Ontario's boreal forest, both when there is complete flexibility regarding harvesting time and when regulations dictate the harvesting date.