The Effect of Stochastic Oscillations in Property Rights Regimes on Forest Output in China

Over the past 60 years, forest tenure in China has oscillated unpredictably between private and common-property regimes. This policy-induced uncertainty has distorted land owners’ harvesting decisions and has lowered the value of China’s forest output. We provide an analytical framework for assessing these effects quantitatively and conclude that substantial losses in the net value of wood harvested over time have occurred. Understanding the consequences of this policy-induced uncertainty is particularly important since China is currently engaged in an ambitious plan to increase its domestic supply of timber. Contrary to the standard result in the literature that catastrophic risk—whether from natural disasters like forest fires or from government expropriation—necessarily leads to premature harvesting, we find that farmers may delay harvesting if sufficient compensation for loss is paid.