Alternative Price Expectations Regimes in Timber Markets

Price expectations play a crucial role in markets for timber and other natural resources. Each period, the resource owner must decide whether to harvest or hold the resource. Since prices in future periods are uncertain, the owner must use a price forecast. Economists have hypothesized alternative mechanisms by which economic agents form expectations. This study develops a dynamic model of individual timber producer behavior to analyze various price expectations mechanisms and determine their role in the timber harvest decision. The model allows for the possibility that producers are risk averse, implying that timber producers must form expectations about both price and price variance. Non-nested hypothesis tests are used to distinguish the expectations regime which best fits market data. The expectations regimes considered are naive and two quasi-rational mechanisms: an exponentially-smoothed model and a nonparametric representation. Data are for hardwood and softwood timber markets in Louisiana.