Optimal rotation periods: An application of contract theory to forest regulation

The IFRO seminar series in economics takes place every last Friday of the month.

The seminar series offers an opportunity to get to know the work of colleagues within the field, to get feedback on your own papers and to enhance your professional network.

Frank Jensen, Associate Professor, IFRO, will present Optimal rotation periods: An application of contract theory to forest regulation.


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 own'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.

If you would like to present something at the Economics Seminars, feel free to contact Jens Leth Hougaard.