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Optimal Forestry Contract with Interdependent Costs

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  • Didier Tatoutchoup Francis

    (École des hautes études publiques (HEP), Université de Moncton, Postal: 18 avenue Antonine-Maillet, Moncton, NB, E1A 3E9, Canada)

  • Samuel Njiki Paul

    (TD Insurance, Université de Montréal, Québec, Montréal, Canada)

Abstract

This article determines an optimal forestry contract when firms’ harvesting costs are interdependent. The value of the optimal allocation depends on the private signals of all firms. We show that the optimal rotation of the winning firm must satisfy a modified version of the usual Faustmann rule, which holds under perfect information. This modification is necessary in order to induce the revelation of private signals on the part of all participating firms. We find conditions under which the optimal mechanism can be implemented as a second-price auction. The optimal rotation period and the reservation price are derived. Theoretically and numerically, we show that the predicted forest owner surplus is considerably misestimated under the independent private value paradigm and the predicted forest owner profit is more affected when the interdependence is negative.

Suggested Citation

  • Didier Tatoutchoup Francis & Samuel Njiki Paul, 2020. "Optimal Forestry Contract with Interdependent Costs," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 20(1), pages 1-13, January.
    • Handle: RePEc:bpj:bejtec:v:20:y:2020:i:1:p:13:n:24
    DOI: 10.1515/bejte-2016-0058
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    References listed on IDEAS

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