What is your discount rate? Experimental evidence of foresters’ risk and time preferences

Topical collection: Risk Analysis

The elicited time preference rate of German foresters is around 4.1%. Foresters working for private enterprises are more risk-averse and have a lower time preference than other foresters. This group difference should be taken into account for modeling and policy making.

Context. Due to very long rotations, forestry investment calculations heavily depend on the underlying discount rate. There is an ongoing debate about the appropriate discount rate to apply in forestry, particularly in light of concerns regarding inter-generational justice, forest risks, and the provision of future positive externalities from forestry. For sound policy making however, knowledge is lacking on the risk and time preferences of foresters.
Aims. The present study aims to provide detailed information about risk and time preferences as essential aspects of the discounting behavior.
Methods. Therefore, we conducted an economic experiment with 142 German foresters. Both risk and time preferences affect discounting behavior, which is why they are estimated jointly but analyzed specifically.
Results. Participating foresters’ risk attitudes range between risk-neutral and very risk-averse, where the sample can be mostly characterized as risk-averse. Time preference discount rates range mostly between 0 and 7%, with 4.1% as a central value. These results are group-specific: foresters working for a private forest enterprise are more risk-averse and have a lower discount rate than other participating foresters.
Conclusion. Foresters’ time preferences exceed the usual rates of return in German forestry, which might be explained by additional utility attributed to forest amenity values or the risk-decreasing effects of forest assets in their portfolio.

Time preference, Risk attitude, Foresters, Economic experiment, Maximum likelihood estimation, Policy support

Sauter, P.A. & Mußhoff, O. Annals of Forest Science (2018) 75: 10.

For the read-only version of the full text: http://rdcu.be/FsLs


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