Economic valuation of long-term timber contracts: Empirical evidence from Germany

•The use of long-term timber contracts was not always based upon transaction cost advantage or upon significant investments.•It was often based on a cost-economizing rationale, as occurs with volume bundling, allowing for efficient price adjustment.•This might explain why many enterprises used incomplete contracts, leaving price renegotiation options open.•Despite claims of efficient contracts they may actually have harbored hopes of a larger future share of ex-post surplus.

The forest timber product economy has recently faced challenges that include: increasing competition between the timber and energy markets for available resources, changing demand for timber, and wood-processing over capacities. It has been observed throughout Europe and in Germany specifically, that often long-term timber contracts have been negotiated to cope with these challenges and problems concerning the exchange of timber. However, the use, and economic value of, long-term timber contracts have not been rationalized yet even where trade involves little or no specific investments. The economic explanation for the use of long-term timber contracts is therefore sought within the theoretical framework based on the insights of transaction cost theory. The presented case study on Germany used 68 semi-structured interviews with forest enterprises and sawmills represented by 71 individual decision makers. The interviews have been analyzed with a content analysis. The results show that motivation for the use of long-term timber contracts was not always based upon transaction cost advantage or upon significant investments, but also upon cost-economizing rationale such as that which occurs with the bundling of timber volume by allowing for efficient price adjustment. The tradeoff of flexibility and hazards of being bound in long-term timber contracts was the consequence.