Optimal Forestry Contract with Interdependent Costs

Francis Didier Tatoutchoup; Paul Samuel Njiki

doi:10.1515/bejte-2016-0058

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Optimal Forestry Contract with Interdependent Costs

Francis Didier Tatoutchoup und Paul Samuel Njiki

Veröffentlicht/Copyright: 9. Juni 2018

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Aus der Zeitschrift The B.E. Journal of Theoretical Economics Band 20 Heft 1

Abstract

This article determines an optimal forestry contract when firms’ harvesting costs are interdependent. The value of the optimal allocation depends on the private signals of all firms. We show that the optimal rotation of the winning firm must satisfy a modified version of the usual Faustmann rule, which holds under perfect information. This modification is necessary in order to induce the revelation of private signals on the part of all participating firms. We find conditions under which the optimal mechanism can be implemented as a second-price auction. The optimal rotation period and the reservation price are derived. Theoretically and numerically, we show that the predicted forest owner surplus is considerably misestimated under the independent private value paradigm and the predicted forest owner profit is more affected when the interdependence is negative.

Keywords: auctions; faustmann rule; forest rotation; forestry contract; interdependent costs; mechanism design

Appendix

Proof of condition (14)

gi∗(θ)=KX′(ti∗)−rX(ti∗)λ(ti∗)=S(ti∗), , where S(t)=K(X′(t)−rX(t))/λ(t) and S′(t)=K[X′′(t)−rX′(t)]λ(t)−λ′(t)[X′(t)−rX(t)]λ(t)2. satisfies

(27)t

Recall that S′(t)<0 . Using eq. (27) we can rewrite gi∗(θ)=gj∗(θ) as

S(ti∗)=S(tj∗)

where s(.) . This means

ti∗=tj∗

For all ∂gi∗(θ)∂θi=−∂iCi(θ)X(ti∗)erti∗−1−(1−αi){hi′(θi)∂iCi(θ)+∂iiCi(θ)hi(θi)}X(ti∗)erti∗−1∂gj∗(θ)∂θi=−∂iCj(θ)X(tj∗)ertj∗−1. satisfying eq. (27), gi∗(θ)=gj∗(θ) . Therefore, ti∗=tj∗ is equivalent to ∂iCi(θ)>∂iCj(θ) . Since ∂gi∗(θ)∂θi<∂gj∗(θ)∂θi is strictly decreasing, it follows that (i) . By the envelope theorem we get:

gi(θ,ti)

If (ψi(θ)X(ti)−Kerti)/(erti−1) then Ti∗(θ) and given that ∂gi(θ,ti)/∂ti=(ψi(θ)λ(ti)−rK)/(erti−1)2 it follows from the preceding equations that ∂gi(θ,ti)/∂ti=0 .

Proof of Lemma 2

ψi(θ)λ(ti)−rK=0 We can rewrite ψi(θ)λ(Ti∗(θ))−rK=0. as θih>θil . For interior solutions, ψi(θih,θ−i)λ(Ti∗(θih,θ−i))=ψi(θil,θ−i)λ(Ti∗(θil,θ−i))=rK>0∂ψi(θ)∂θi=−(1+(1−αi)hi′(θi))∂iCi(θ)−(1−αi)hi(θi)∂iiCi(θ)<0. satisfies^[10]:

(28)λ(Ti∗(θih,θ−i))>λ(Ti∗(θil,θ−i))

Assume λ′(ti)=(1−e−rti)[−X′′(ti)+rX′(ti)]>0 , then

Hence, λ is decreasing in Ti∗(θih,θ−i)>Ti∗(θil,θ−i) which implies that (ii) and therefore gi∗(.,θ−i)−gj∗(.,θ−i) . Observe that v because [θ_,θ‾] is increasing and strictly concave. Thus, v(θ)=0⇒v′(θ)<0 is increasing and we may conclude that v(θh)>0⇒v(θ)>0∀θ<θh . gi∗(θih,θ−i)>max{0,maxj≠igj∗(θih,θ−i)} follows from the application of lemma 3 below to the function gi∗(θih,θ−i)>0 .

Lemma 3.

If gi∗(θih,θ−i)−gj∗(θih,θ−i)>0 is differentiable in i≠j and satisfies gi∗(θi,θ−i)−gj∗(θi,θ−i)>0∀θi<θih , then ψi(.,θ−i) .

The proof of the lemma is provided below.

Indeed θi means that

gi(.,ti) and θi for gi∗(.,θ−i) . Using the condition eq. (14) and the preceding lemma, we deduce that gi∗(θil,θ−i)>0 . Since (iii) is decreasing in θih>θil∈△i(θ−i) we also deduce that gi∗(θih,θ−i)<max{0,maxj≠igj∗(θih,θ−i)} is decreasing in qi∗(θih,θ−i)=0 . Therefore −∂2ωi∗(θih,θi,θ−i)qi∗(θih,θ−i)=0≤−∂2ωi∗(θil,θi,θ−i)qi∗(θil,θ−i) is non increasing as the maximum of decreasing functions, thus gi∗(θih,θ−i)>max{0,maxj≠igj∗(θih,θ−i)} .

(ii) Fix gi∗(θˆi,θ−i)>max{0,maxj≠igj∗(θˆi,θ−i)},∀θˆi≤θih , if gi∗(θˆi,θ−i)>0⇒ψi(θˆi,θ−i)X(Ti∗(θˆi,θ−i))>KerTi∗(θˆi,θ−i)⇒ψi(θˆi,θ−i)>0. , then

λ(Ti∗(θˆi,θ−i))>0 and ∂2ωi∗(θih,θi,θ−i)qi∗(θih,θ−i)−∂2ωi∗(θil,θi,θ−i)qi∗(θil,θ−i)=∂2ωi∗(θih,θi,θ−i)−∂2ωi∗(θil,θi,θ−i)=∂∂θˆi[∂2ωi∗(θˆi,θi,θ−i)]∣θˆi=θio(θih−θil),θio∈(θil,θih)=∂iTi∗(θio,θ−i)∂iCi(θ)λ(Ti∗(θio,θ−i))erTi∗(θio,θ−i)(erTi∗(θio,θ−i)−1)2>0. . Now suppose that θ_<θo<θh<θˉ .

v(θo)≤0 implies that v(θh)>0 .

v(θo)=0

It follows from eq. (28) that: v(θo)<0 . Using the mean value theorem we may write the following equalities:

v(θh)>0

Proof of Lemma 3

Assume that θoˆ∈(θo,θh) , v(θoˆ)=0 and θ1=Sup{θ∈[θo,θh]:v(θ)=0} . We can assume without loss of generality that v . Indeed, if v(θ1)=0 then since v′(θ1)<0 , the intermediate value theorem implies that there exists v such that θ1 . Let θ2∈(θ1,θh):v(θ2)<0=v(θ1) . Because v(θ3)=0 is continuous we have θ3∈(θ2,θh) and therefore θ1 . This means that θ3>θ1 is locally decreasing around θ1 : there exists θ2∈(θ1,θh):v(θ2)<0=v(θ1) . Again the intermediate value theorem implies that v(θ3)=0 for some θ3∈(θ2,θh) . This contradicts the fact that θ1 is the supremum since θ3>θ1 .

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Published Online: 2018-06-09

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https://doi.org/10.1515/bejte-2016-0058

Schlagwörter für diesen Artikel

auctions; faustmann rule; forest rotation; forestry contract; interdependent costs; mechanism design