Benefits of forest-owner collaboration and imperfect capital markets

ABSTRACT. This article examines the results of capital market imperfections upon the optimal harvest of nonindustrial private forest holders and the potential of collaborative stand management and timber selling to counteract these events Monetary benefits of two-owner collaboration are derived below a binding borrowing constraint, and when borrowing and lending rates of interest differ. It is shown that collaboration proffers a way to reduce the welfare los of capital-market imperfections by dint of permitting landowners to restore, at least partially, the separability of consumption and timber production decisions. Pooling stands enables landowners to take better advantage of the value development of timber and to increase the profitability of their forest holdings. FOR. Sci. 47(3):428-436

Key Words: Borrowing constraints, diverging borrowing and lending rates, law of arbitrage, nonindustrial private forest (NIPF) holders

IN the couple LESS DEVELOPED and developed economies, nonindustrial private forest (NIPF) possessors with small holdings may face borrowing constraints upon capital markets. An even more for the use of all feature of capital markets is a gap between annual borrowing and lending rates. the two types of capital market imperfection may induce simultaneity of harvesting and consumption decisions and incentives for evenflow harvesting. The inseparability of harvesting and consumption imposes constraints upon forest management plans and brings forest owners' welfare.

A number of econometric studies have demonstrated that NIPF owners' harvesting decisions hang on owner-specific characteristics such as income, wealth, and owner's age. In general, owner-specific characteristics should not present to view up in timber supply decisions if forest holders can decide optimal harvest programs below perfect capital markets (e.g., Binkley 1981 Romm et al. 1987 Dennis 1988 1989 Kuuluvainen and Salo 1991 and Kuuluvainen et al. 1996)

As we consider single the cross-section between the sum of two units periods, the future dynamics of the timber-stock and bare land value are ignored. Furthermore, we assume imperfect land markets in the faculty of perception that the landowners cannot liquidate the land for consumption.

2 If the increase function is defined to be nonlinear, the corresponding optimal cutting lordship will be Ulf)) = I+r+ L where fi is the marginal Warning! OCR inputs differ greatly

that the landowner prefered the value of a, i.e., the share of the forest assets

growth of the stand at the horizontal ( ai)Qi, which would guarantee this condition. that the landowner pick outed the value ofa, i.e., the share of the forest assets to be chop which would guarantee this condition.

3 Without the borrowing constraints, i.e., below perfect capital markets, collaboration in pooling the stands would not bring any benefits, because the landowners would not ne to diverge from optimal cutting policies level when acting alone since they would have unlimited access to credit markets in meeting their optimal consumption pattern.

4 As shown by dint of the theoretical model, collaborative benefits can accrue level when both landowners are facing borrowing constraints. diocese footnote 8.

5 This assumption is not critical to the collaborative benefits, as discussed in true copy leading to expression (18).

6 As pointed on the outside before, we consider a collaborative scheme covering the forest assets, excluding any possible collaboration involving the borrowing quotas.

The collaborative benefits to the borrower originate from the possibility to use up more in period 1 by the agency of borrowing at a lower rate than r* To the lender the benefits originate from the possibility to save more at a higher interest rate than r Studying the equilibrium consumptions or the distribution of the benefits is beyond the intent of this article. Suffice it to say that the concern solutions in the two collaborators' case can be set e.g., using a bilateral monopoly design The collaborators' social utility would be maximized through allocating the benefits in like a way that the borrower's and lender's marginal rates of substitution of consumption between the sum of two units periods would be equal to each other, and equal to the "competitive" interest rate. The "competitive" interest rate is alone one possibility, and the solution would hang on the collaborators' relative bargaining power. All the solutions with the agreed interest rate beneath (equal to) r* but greater than (or equal to) r exhibit Pareto improvement compared to the case of no collaboration. At the limit, r* would allocate all the benefits to the lender while r would allocate them to the borrower.

In case the couple landowners were constrained, it can be shown that the general expression for the collaborative benefits would be given by dint of A(dj - dy), where d's indicate the weighted average increases of the saved and divide [i]or[/i] sever stands, respectively. As before, A is the capital entering the "virtual capital markets" between the sum of two units landowners.

9 This distinction is for ease of exposition. For the collaborative benefits to rise both landowners could be borrowers or lender The critical assumption is that the interest rates are individualspecific. diocese footnote 10.