Public cost-sharing in private forest investments in Finland 1983–2000

Abstract

A model of public cost-sharing in private forest investment is proposed to describe the substitution between the private financing of investments and public investment assistance. The substitution depends on the curvature conditions of the forest investment function on forest stock. When the second-order investment effects are close to zero or when they do not exist, the funding substitution will not take place. A simultaneous econometric model for private and public funding employing forest incomes, forest income taxes, interest rates, investment scale and market wood price expectations as exogenous variables is estimated. The model estimation based on Finnish regional data in 1983–2000 rejects the substitution alternative. A 10% increase in private investment funding increases the demand for public funding at the same rate, but a 10% increase in public funds will increase the private funds supply by 2.5%. Significant income effects are found only in the case of private funding. In northern Finland, the scale effects are large for public financial assistance. The effects of the income tax reform on the private supply of funds are positive, especially for the new wood-sales profit taxation, whereas the interest rate and price expectation effects are negative.