Optimal contract arrangements for conservation on working forests

Forestland can be managed for timber and environmental goods simultaneously. A conservation contract allows a government agency to pay a landowner for the portion of property rights encumbered in the production of environmental goods. In this study, a theoretical model is developed to examine optimal contract provisions for carbon sequestration on working forests under a budget constraint for the agency. The analyses reveal that a landowner requires a higher payment if more property rights are encumbered in a conservation contract. A landowner whose land can sequester more carbon also requires a more favorable contract arrangement. Assuming a logistic growth path for carbon sequestration, the agency under a budget constraint tends to have a shallower relationship with more landowners, that is, encumbering a smaller portion of property rights from more landowners. This tendency supports the use of conservation contracts with a shorter term and a higher enrollment share in a forest community.