Enforcing the rules in timber concessions: Performance bonding in the presence of corruption risk

Abstract

Performance bonding is a common method to enforce logging standards and timber contract rules, yet their applications in tropical concessions are still uncommon, with prohibitively high cost of capital, imperfect enforcement, risk of corruption, and long payback periods cited as reasons. In the face of these factors, we derive conditions for a feasible bond scheme and the amount of additional insurance a landowner can ask from a harvester in the form of a higher than strictly needed bond payment. We then determine the effect of confiscation risk on the feasibility of bond schemes, with this risk stemming from the presence of a corrupt inspector and taking the form of either collusive or non-collusive corruption. We show that confiscation risk can seriously limit the range of possible bond payments and the effects differ between the corruption types. An empirical example evaluates these results in the context of enforcement of reduced impact logging techniques in tropical concession management. The results will help governments better apply bond schemes and in particular adjust them in the presence of risks and external constraints.