Forest land conversion over time: Implications for the Faustmann formula

Abstract

The Faustmann timber production model has been used to examine the allocation of land between alternative forest land use options. This article provides a clarification and extension of this previous work. We use the basic forest land use options model to allow for the changes in forestland use overtime. First, we modify Faustmann's original assumptions to allow for a one-off change in prices or an initial allocation constraint, and examine the forest land manager's decision to switch to an alternative land use at some point in the future. Second, we look at the case where prices evolve over time and it is optimal for the forest land manager to switch between land uses on an equilibrium path. This second extension provides a new application of the Faustmann timber production model. We discuss the theoretical insights and the implications for forest conversion.