Economic Modeling in Forestry: Avoiding the Lucas Critique

Abstract

Timber supply is a primary object of economic modeling in forestry, especially in the context of policy evaluation. Policy changes have two potential effects on timber supply. First, they may change the relationship between the quantity of timber harvested and its determinants. Secondly, they may alter the values of the factors that influence timber supply. A standard approach for policy evaluation is to estimate the supply function from observed harvest behavior, and then use the obtained supply function to simulate the effects of policy changes. A limitation of this approach, known as the Lucas Critique in economics literature, is that it usually cannot capture the first effect of policy changes on timber supply. This paper presents a new approach to estimate the timber supply function by introducing two applications in counterfactual comparisons. The approach seeks to optimize the supply function parameters under a given set of policy conditions. In the first application, we determine the change in the supply function following a change of the market regime and measure the welfare gain from competition in the timber market. The second application examines the effects of tree improvements on the timber supply function and on the producer and consumer surplus. These two cases illustrate that our approach is capable of determining the change in the supply function coefficients induced by policy or technological changes. Results from the second application also show that ignoring the change in supply functions leads to significant underestimate of the welfare effects of biotechnological improvements in forestry.