Optimal forest management with stochastic prices & endogenous fire risk

Earth observations are one way to reduce the risk to standing forests from damages caused by wild fires, since they enable early warning systems, preventive actions and faster extinguishing of fires, before they spread out. Another channel through which fire hazard can be reduced is the thinning of the forest, so the risk of a fire occurring becomes partially endogenous. In order to shed more light on optimal forest management under such endogenous fire risk, we develop a real options model, where the price of biomass is stochastic and the harvesting decision needs to be timed optimally in the face of these uncertainties. We find that there is a positive value of information. In other words, there is a positive willingness to pay for Earth observations by forest managers.

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