Effects of Public Financed Aid on Private Forest Investments: Some Evidence from Finland, 1963–2000

The relationship between private forest investments and public cost sharing (government financial aid to private investment projects) was first analysed with an economic optimization model. In the general case the model predicted that cost-sharing causes substitution between private funding of investments and public aid. However, in some special cases complementarities were not ruled out. Next, the model predictions were tested with a translog cost function specification of forest investment fund shares. Aggregate data from Finland in years 1963–2000 were used. The substitution and own price elasticities of purely private, subsidized individual and subsidized collective investments are derived from maximum likelihood estimates of translog system model, allowing for investment scale effects. Investments supported by public funding behave in a strongly complementary fashion to each other. Some substitution of subsidized private funding for non-subsidized private funding was found. Strong scale effects and forest investment incentives were found among forest owners in response to public investment aid.