Combining Sharecropping and Command and Control Incentives in Principal Agent Analysis: A Forestry Example

Command and control provisions may be implemented in situations where firms receive some return from their regulated actions. A case in point involves forest regeneration requirements on private or public land. A model is developed that is used to show how optimal command and control penalties may be set when firms have some equity in future crops. Results show that as stumpage collected increases, equity to the firm decreases, causing the optimum penalty to increase. Likewise, if a divergence in social and private time preferences and/or non-timber benefits cause social values to be external to the firm, the optimum penalty may be adjusted to internalize these values.