10.2190/AGKQ-MWLM-1397-BTGG AGKQMWLM1397BTGG 4 Stumpage Price Uncertainty and the Optimal Rotation of a Forest: An Application of Sandmo Model 305 313 20020509 20020509 20020509 20020509 AGKQMWLM1397BTGG.pdf http://baywood.metapress.com/link.asp?target=contribution&id=AGKQMWLM1397BTGG 4 Rabindra N. Bhattacharyya Donald L. Snyder Department of Economics, Utah State University The Faustmann model has played a key role in the determination of the optimal forest rotation. Faustmann developed a simple and deterministic competitive economic model, the objective of which was to maximize the present value of perpetual returns to the fixed factor, a unit of timberland [1]. The optimal rotation problem thus viewed is a timber management problem abstracting from any environment of uncertainty. This article considers an alternative model formulation that treats a forest resource operated under conditions of stumpage price uncertainty and forest owners with risk aversion. A modified Faustmann-type rule under conditions of stumpage price uncertainty is developed based on the theory of a competitive firm under price uncertainty developed by Sandmo [2]. The Sandmo model is then used to investigate the effects of an increasing risk on the optimal rotation age. M. Faustmann (1849), On the Determination of the Value which Forest Land and Immature Stands Possess for Forestry, in <i>Oxford Institute Paper</i>, M. Gare (ed.), Oxford University, Commonwealth Forestry Institute, CITY, 1968. A. Sandmo, On the Theory of Competitive Firm Under Price Uncertainty, <i>American Economic Review, 61</i>, pp. 65-73, 1971. J. M. Henderson and R. E. Quandt, <i>Microeconomic Theory: A Mathematical Approach</i>, McGraw-Hill, New York, NY, pp. 53-54, 1980. K. J. Arrow, <i>Essay in the Theory of Risk Bearing</i>, Markham Publishing Co., Chicago, IL, 1971. J. W. Pratt, Risk Aversion in the Small and in the Large, <i>Econometrica, 32</i>, pp. 122-136, 1964. P. Samuelson, Economics of Forestry in an Evolving Society, <i>Economic Inquiry, 14</i>, pp. 466-492, 1976. C. J. Norstrom, A Stochastic Model for the Growth Period Decision in Forestry, <i>Swedish Journal of Economics, 77</i>, pp. 329-337, 1975. Y. Ishii, On the Theory of Competitive Firm Under Price Uncertainty: Note, <i>American Economic Review, 67</i>, pp. 768-769, 1977.