| A considerable amount of research has been directed into analyzing the value of flexibility when considering uncertain and irreversible decisions. In general, little attention has been devoted to how contract terms might affect initial bidding and flexible harvest decisions. In this paper, I develop a model to evaluate how contracting terms and uncertainty affect valuation and harvest timing within a real options framework. US Forest Service timber sales awarded via English auctions are analyzed and the role of price adjustment mechanisms, payment terms and liquidated damages is considered. The price adjustment indexes used on USFS contracts are examined and found to exhibit statistical properties unlikely to be generated by a random walk including serial correlation and conditional heteroskedasticity. Empirical results indicate that the impact of USFS program revisions on bidding behavior were likely to be small, except for the imposition of the price adjustment mechanisms which lowered bids in Olympic and Mt. Baker-Snoqualmie National Forests. However, harvest rates tended to be higher on contracts with SRA provisions than those without, consistent with a real options model. The results indicate that Douglas Fir and Hem-Fir bids were not impacted in Olympic National Forest but fell in Mount Baker-Snoqualmie National Forest. |
