Worse off on purpose: An economic analysis of deliberate forest degradation

Abstract

High grading is, by definition, wealth-destructive, and yet the practice is widespread. Explanations of high grading typically assume landowners are greedy, impatient, or ignorant. None of these explanations are robust. This paper develops an analytical model of landowner decision making that provides a richer explanation for this counterproductive practice. The model centers on buyers’ behavior in markets for heterogeneous-quality forestland. Facing imperfect information, it is rational for buyers to shade their estimated valuation of a prospective property up or down toward the region-wide average. Because high-quality forestland thus sells at a discount, and low-quality forestland for a premium, the so-called strip-and-flip strategy can outperform good, long-term silviculture. A simulation case study for a northern hardwood forest in the Adirondack region of New York illustrates this theoretical model. The simulation incorporates empirical growth models, continuous quality-specific price functions, and integer programming methods to specify the tree-by-tree harvest schedule that maximizes long-term net present value. An alternative simulation conditions cutting decisions on the expected sale price at the end of a ten-year investment period, resulting in a systematic—or, perhaps, “selective”—shift in harvesting patterns favoring removal of high-value trees. In presenting an improved theory of high grading, this study helps direct policy makers’ attention away from dismissive characterizations of landowners as dumb, greedy, or both, and toward closer analysis of the institutional factors that drive deliberate forest degradation.