Protecting Timber Supply on Public Land in Response to Catastrophic Natural Disturbance: A Principal-Agent Problem

Abstract

Catastrophic natural disturbance creates a dilemma for the public forestland owner desiring to retain growing stock and salvaging some, if not all, of the damaged timber. If logging on public forestlands is conducted by private forest companies under various tenure arrangements, attainment of the government's objectives depends crucially on how companies respond to various incentives. This is a classic principal-agent (PA) problem. We investigate the PA problem in the case of catastrophic natural disturbance caused by the mountain pine beetle in British Columbia; we do so using a bilevel programming approach. The principal (government) uses harvest levels, contractual conditions, and stumpage fees to incentivize agents (forest companies) to harvest beetle-impacted pine while leaving sufficient living pine and nonpine species to ensure an adequate future timber supply. Results exploring volume-based tenures indicate that, as a response to catastrophic disturbance, the government should be circumspect in applying the three strategies unilaterally. Simply raising harvest levels to facilitate salvage is not adequate and will likely require a lowering of stumpage prices, which may lead to a reduction in government revenue. Our research also suggests that the government may wish to favor agents with established mills over those interested only in maximizing net returns from logging and selling logs on the open market.