Cost sharing for timber stand improvements: Inducement or crowding out of private investment?

- Two-step estimation is used to deal with the endogeneity of cost-share participation.
- Cost sharing clearly encouraged family forest owners' timber stand improvements.
- Cost sharing and personal assistance proved to be an effective combination.
- Evidence suggests that cost sharing had an inducement effect on private investment.

Cost sharing has been widely used to encourage the management of privately owned forests. While there is evidence of its capacity to promote management activities, it still remains open whether cost sharing induces additional private investments or whether it substitutes public funds for private capital. This study re-examines the latter issue in the case of Finnish family forest owners' pre-commercial and restoration thinnings using data from a nation-wide survey (n = 3801). A two-step model of cost-share participation and stand improvements is used to account for the endogeneity of cost-share participation. Cost-share participation was related to personal assistance and clearly encouraged forest owners' engagement in and extent of stand improvements. The inducement or crowding out of private capital is analytically shown to depend on the relative magnitude of forest owners' response to cost-share incentives in each specific situation. In the present case evidence suggests that cost sharing has had an inducement effect on private investment. This is likely related to the advanced personal assistance that has promoted the knowledge of and participation in cost sharing. The findings suggest that cost sharing can be a useful component in a balanced policy mix especially when combined with informational instruments.