Forest management and economic rents: Evidence from the charcoal trade in Madagascar

Licensing the exploitation of forest resources is often used as a preferred policy to regulate natural resource management in developing countries. Based on survey data from 178 charcoal traders, this paper studies the regulated charcoal trade in Madagascar and tests if regulatory control through a licensing system leads to rents (i.e., excess payments above those required to induce or provide for production) in charcoal trade. Two main findings were made. First, annual gross margins are significantly higher for traders in the regulated low-value charcoal industry compared to traders in the unregulated agricultural sector. Moreover, differences in transaction characteristics cannot explain the disparities in margins. This evidence suggests that at least part of rents is captured by intermediaries (e.g. traders), and that these rents are not trivial (gross margins in charcoal trade are more than twice as large as in agricultural trade). Second, traders in the charcoal sector with more government connections have greater access to the rents that stem from charcoal regulation. A significant portion of charcoal trade circumvents regulation suggesting that traders' margins are increasing in rent-specific social capital (i.e. number of government officials known). This is in stark contrast to the agricultural sector where no such effect is found. Efforts to design or reform policies intended to prevent deforestation and forest degradation through licensing, must clearly take this into account.

► Margins are higher in regulated charcoal compared to unregulated agricultural trade.
► Charcoal traders with more government connections have greater access to rents.
► Efforts to reform policies through licensing must take rents into account.