Corruption and Illegal Logging in the Tropics

It has been more than a half-century since Gordon (1954) drew attention to the inefficiency associated with open access resources. These resources tend to be ‘overexploited’ in equilibrium because users optimize by ignoring the social costs that their actions impose on other users of the resource.  Tropical forests in many developing countries, are often legally state-owned property, but are usually treated as de facto open access resources.  The logging industry in almost all countries is thus regulated to attempt to ensure that forests are not overexploited.  In order to ensure that loggers do not exceed their quota of harvest, the government must monitor logging activity.  If the government hires inspectors to monitor loggers, there is always a possibility that corruption could arise; that is the loggers could bribe the inspector to ‘overlook’ their illegal activity.  In recent years, the issue of corruption in developing countries, and specifically in the natural resource sector, has gained increasing attention.  Many tropical countries have been pressured by international institutions such as the World Bank, European governments, and the U.S. to increase enforcement of domestic logging regulations.  In this paper, we present a simple game theory model of a forestry sector in which regulation is put in place to improve upon the open access equilibrium and that loggers and an inspector engage in corrupt collusion.  We compare social welfare in an open access regime with a situation in which the sector is regulated and corruption is possible.  We find that welfare is higher with no regulations if laws against illegal logging are completely unenforced.  In addition, welfare has a U-shaped relationship with enforcement probability so that beyond a certain enforcement probability, welfare increases with enforcement.  Thus international pressure on countries to increase their enforcement of their own domestic laws could actually increase domestic social welfare