Optimal rotation periods: an application of Contract Theory to Forest Regulation
Résumé
In this paper we construct a general principal-agent model to discuss voluntary subsidies
to a forest owner to increase the rotation period in a situation with asymmetric information about
the owner´s cost type. It is shown that for the forest owner with low cost the voluntary subsidy shall
be based on differences in the objective functions between the principal and the agent. However, for
an owner with high costs the subsidy shall also include an incentive cost to secure correct revelation
of the owner´s cost type. The general model is used to study various forest owner objectives such as
maximization of the value of timber, maximization of the social welfare and maximization of a mix
between the timber value and the social welfare. With welfare maximization there is no difference
in the objective functions between the regulator and the forest owner so no contract is necessary.
We also investigate the implications of regulator uncertainty about the forest owner payoff. Both
when the regulator perceives a wrong objective function for the forest owner and when regulator is
uncertain about the objective function of the owner, uncertainty may imply a lower welfare
compared to a situation with full certainty about the forest owners goal.