Optimal forest conservation: The role of green-image demand and investments

We investigate optimal forest conservation in a strategic-trade framework. Exporting firms produce wood products with domestic timber and use investments to reduce production costs. Conservation influences the industry equilibrium through higher timber prices and a price premium generated by the products’ green image. Higher timber prices reduce the firm's investments and output, but a strong demand effect reverses the result. The optimal conservation level is therefore lower than the first-best, unless the demand effect is strong. The equilibrium of a multilateral policy game involves higher industry profit and higher conservation requirements in both producing countries, when the demand effect is strong.