The Effects of Neighboring Parties on the Value of Rights: Evidence from Timber Harvests

Abstract

We study the effect that neighboring parties have on the economic rents from owing the rights to a natural resource. Our application uses winning bid prices from state timber auctions in three western states. We model and show how differing nearby neighbors increase the costs and risks associated with purchasing certain rights. Consistent with our hypotheses, the winning bid price of state-run timber auctions is inversely related to the length of the border that a third party shares with the harvesting area. The lower winning bid prices reflect an increase in the expected costs of protecting the rents due to the presence of potential third parties’ challenges to property rights. We further test our model when there is third party demand for other uses to the timber such as a scenic view. The results consistently show that when third parties potentially threaten property rights, the winning bid decreases.