On Solving the Multirotational Timber Harvesting Problem with Stochastic Prices: A Linear Complementarity Formulation

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Abstract
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.
Funding Information
  • Tembec
  • Ministry of Natural Resources