When should households be compensated for land-use restrictions? A decision-making framework for Chinese forest policy

Competing uses of land mean that regulations aimed at environmental conservation often conflict with the land-use rights of rural households. Several reports suggest that this has occurred with the introduction of the Natural Forest Protection Programme (NFPP) in China, one of the world's largest logging ban programmes. This paper investigates whether households should be compensated for infringements on property rights, drawing on institutional economics literature on regulation. We distinguish between cases where regulation solves local collective action problems and increases the welfare of those affected, and those where regulation involves a redistribution of rights from one group to another. We apply this to the NFPP by estimating the net welfare impacts, using household level stated preference data with econometric techniques that explicitly account for zero and negative values of the dependent variable. We find that the ban on logging does not affect the net welfare of the affected forest communities. This indicates that the losses resulting from the restrictions on property rights are offset by the benefits from restrictions on other local households. We also find evidence that a partial reduction in logging would be welfare increasing, indicating that the NFPP is to some extent addressing local collective action problems in forest areas. Broader implications for the question of compensating for infringement of property rights as the result of regulatory interventions in contexts of institutional imperfections are also drawn.