Vertical Integration in Mexican Common Property Forests

"One of the missing links in common property research has been the interaction between common property resource users and the market. The present research fills that gap with a study of Mexico's agrarian communities which coordinate timber production within their commonly-owned forest land. The key research questions are whether a local community expands into downstream timber extraction and processing or contract with outside firms for production depending on uncertainties in production, and does the pattern of organization promote complementary investments in timber and nontimber production? "The property rights approach in contract theory and the common property literature form the basis of the analytic framework. A survey was administered to a random sample of 42 communities in Oaxaca, a state in southern Mexico with large expanses of pine-oak forests. The communities fall into four main categories indicating their level of ownership and control over the production process from standing timber to finished wood products: communities which contract with private companies who pay the community to harvest standing timber, communities which harvest the timber themselves and sell roundwood, and communities which harvest the timber and transform it into lumber or other wood products. The level of vertical integration serves as the dependent variable in an ordered logit regression on theory and control variables. The model is extended to determine the impact of vertical integration on nontimber investments, empirically tested with instrumental variables regression methods. Empirical results provide evidence that communities opt to integrate forward when fixed costs of organization are lowered to control timber and nontimber production and possibly guide economic development within the community. In contrast to the transaction cost literature, outside firms are willing to make specific investments in return for access to timber resources. As predicted, vertical integration leads to greater investments in nontimber benefits."