Ken Jung

Abstract: Natural resource owners frequently design and auction extraction contracts in order to raise revenue while achieving specific management objectives. I study the tradeoff between revenue and the timeliness of extraction in British Columbia timber auctions during the mountain pine beetle outbreak, a large environmental shock that increased the urgency of rapid harvests in infested forests. I show that the use of quality-adjusted pricing in auctions following the "scaled" bidding format made it profitable for firms to salvage value from beetle-killed trees, but also provided incentives to delay the harvest of decaying trees. To assess how successfully the province achieved its objectives, I estimate bidding strategies in auctions and harvesting behavior by winning firms as functions of bidding format, term length, and beetle attack severity. I then simulate revenue and delay outcomes for each auction under an alternative contract design—namely, the "lump sum" contract in which quality-adjusted pricing was absent—and terms of varying lengths. I show that the province's contracts were frequently interior to the optimal frontier between revenue and delay, with an average decrease in delay of 2.8 months (a 40% reduction) in scaled auctions that were improvable by switching to a lump sum auction with revenue-equivalent term length. The potential gains from bidding format reassignment are greatest in tracts with the largest shares of beetle attack, indicating substantial benefits to a more targeted approach to contract design.