Recursive preferences in forest management

Expected net present value (ENPV) is a commonly used criterion in optimal f orest management; however, this only applies to risk neutrality. If the own er has other risk preferences, then a utility function should be used. Expe cted utility is the most common way to handle stochasticity in an atemporal framework, but is problematic in intertemporal problems. Recursive prefere nces overcome a variety of the difficulties associated with expected utilit y in stochastic control problems. Recursive preferences (RP) are applied he re to forest management. The effects of risk aversion and intertemporal sub stitution on optimal management are weighed using this framework. Compared to ENPV, RP with empirically plausible levels of intertemporal substitution implies substantially increased harvest levels in the early years, which d rastically reduces the stock growth rate. In contrast, risk aversion has li ttle or no impact on optimal management except for an infinite elasticity o f intertemporal substitution. In this instance, increasing risk aversion lo wers the time to steady-state and the level of steady-state forest stocks.