ABSTRACT
Because of volatility in demand, timber prices tend to fluctuate from year to year. Timber owners know today's price but are uncertain about tomorrow's prices. Traditional Faustmann harvesting ignores these random annual price fluctuations and prescribes harvests on the basis of expected prices. This chapter discusses an asset sale model to forestry and solves for the optimal schedule of reservation prices. When current price is above the reservation price, owners should cut that age class, otherwise they should wait another year. This flexible price harvest policy significantly increases the present value of expected returns over the more rigid Faustmann model. A common assumption in economics is that the error structure around an empirical model's predictions is normally distributed. The most important measure of the desirability of flexible price harvesting is the resulting increase in the expected net present value of future timber revenue.
