Timber Management Decision Making under Imperfect Capital Markets

Capital market imperfections seldom have been considered in the choice of financial criteria for making timber management decisions. A forest planning model for evenaged timber management is developed to evaluate criterion selection under imperfect markets. Some investment rules are shown to be equivalent to maximizing the firm's liquidation value for certain capital market conditions. Although imperfect capital markets severely limit wealth accumulation, small deviations from the optimal harvesting schedules do not severely affect the firm's value. Much concern about criterion selection would evaporate if the firm's investing and financing functions were integrated into a single process. Key words: dynamic programming, forest investment, investment criteria, rotation age. Assuming perfect markets in capital theory allows derivation of simple, elegant solutions to optimal intertemporal resource allocation, but no theory exists to handle capital budgeting problems when imperfect capital markets are encountered. Under a perfect capital market, adopting a strategy that maximizes the crite-rion "net present value of the firm " is equiva-lent to maximizing the economic welfare of the firm's owners. In imperfect markets this equiva-lence does not necessarily hold, and the prob-lem of determining an acceptable financial decision-making criterion arises.' Both net present value and internal rate of return have been proposed as criteria for mak-ing decisions in forest management, but relat-ing criterion selection to imperfect capital markets has been rarely considered. This study is a first attempt to incorporate imper-fect capital markets into a forest planning model using dynamic programming. Past Work Usually the primary investment goal is to maximize utility from consumption or to Paul A. Murphy is a resource analyst with the Southern Fores