Socially Optimal Royalty Design and Illegal Logging Under Alternative Penalty Schemes

35 Pages Posted: 11 Aug 2004

See all articles by Erkki Koskela

Erkki Koskela

University of Helsinki - Department of Political and Economic Studies; CESifo (Center for Economic Studies and Ifo Institute); Bank of Finland - Research Department; IZA Institute of Labor Economics

Gregory S. Amacher

Virginia Polytechnic Institute & State University - Department of Forestry

Markku Ollikainen

University of Helsinki - Department of Political and Economic Studies

Date Written: February 2004

Abstract

We study the socially optimal design of forest royalty and enforcement instruments in the case where concessions are allocated by a government, illegal logging incentives are present, and the government has available both area-based and value-based royalty instruments. When harvesters are risk neutral, the optimal policy mix depends on the presence of negative externalities and on the type of penalty scheme. For risk-averse harvesters the results differ. When the penalty is assessed on undeclared income, a royalty based subsidy is not optimal, but when penalties are levied on evaded royalty payments, the optimal royalty system may be progressive or regressive depending on the importance of the government's revenue constraint. Auditing is optimal regardless of the penalty scheme or presence of externalities, although its level differs. Accounting for negative externalities in the social welfare function implies a higher optimal royalty rate, but lower progression in the rate, and increased auditing.

Keywords: illegal logging, royalty design, penalty schemes

JEL Classification: D81, H26, Q21, Q23

Suggested Citation

Koskela, Erkki and Amacher, Gregory S. and Ollikainen, Markku, Socially Optimal Royalty Design and Illegal Logging Under Alternative Penalty Schemes (February 2004). CESifo Working Paper Series No. 1131. Available at SSRN: https://ssrn.com/abstract=516302

Erkki Koskela (Contact Author)

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland
+358 9 191 8894 (Phone)
+358 9 191 8877 (Fax)

HOME PAGE: http://www.cesifo.de/servlet/page?_pageid=56&_dad=portal30&_schema=PORTAL30&pa_id=7298

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Bank of Finland - Research Department ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Gregory S. Amacher

Virginia Polytechnic Institute & State University - Department of Forestry ( email )

307 Cheatham Hall
Blacksburg, VA 24061
United States

Markku Ollikainen

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland

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