Private and public timber production: How markets and political institutions matter

- An economic explanation for the simultaneous existence of public and private timber production enterprises is presented.
- The main difference between public and private timber enterprises relates to the exit clause.
- The strong exit clause in public enterprises increases the liability for hedging the risks of timber production.
- The unconstrained majority rule in public decision making transfers the high degree of liability to a minority.
- The strong exit clause in public enterprises increases the forest rotation length.

The aim behind this paper was to find a logical explanation for the simultaneous existence of public and private timber enterprises based on an individual, subjective benefit-cost weighting made in the context of different institutional arrangements. In the section on modeling, the effects of the separation of forest ownership and forest management, and of private and public ownership sharing are studied. The main difference between public and private timber enterprises relates to the exit clause. Whereas public timber production is characterized by a strong exit clause, in the case of private timber enterprises the individual stockholder can exit almost without constraint. The strong exit clause in public enterprises increases the liability as technique for hedging the risks of timber production. This becomes more pronounced the greater the degree to which the public fiscal decision is separated into a production and a liability decision. The reason for this is that where there is a higher degree of public decision making an unconstrained majority rule applies, which also leads to a transfer of liability to a minority. Another factor is that the limited time perspective involved in public choices does not outperform the advantage of lower interest rates associated with public timber production. The strong exit clause in public timber enterprises also provides an opportunity for the forest manager to increase the forest rotation length. The paper concludes with some remarks on how the results obtained from the simple public choice model employed in the study are applicable to a representative democracy.