Lemons and Timber. The Case of Tropical Timber Investment Funds in the Netherlands

In this paper, we analyze the behavior of Dutch tropical timber investment funds in relation to financial regulation. These funds are a niche market within the market for socially responsible investments. Duri ng the past few year s, se veral Dutch timber funds went bankrupt, whereas others were surrounded by scandals. Partly as a reaction to this, tighter regulation was developed and implemented. In resp onse to the regulatory changes timber funds adjusted their operations and bus iness strategy. The lack of supervision of tim ber funds, the subsequent tightening of the regulation and the strategic responses of the timber funds fits into the ‘regulatory dialectic’ as de scribed by Edward Kane. Moreover, we can use Akerlof’s concept of informational asymmetries to explain the underlying cause of the regulatory dialectic. The key problem with the Dutch timber funds is that there is no financial supervision with respect to the liquidity and the solvency of the timber funds. Consequently, investors are unable to verify the claims made by t he timber funds, which causes major information asymmetries between the two parties. Our case study demonstrates how a lack of regulation can spoil a market that in itself has the potential to offer something useful to society.