Growing world demand for processed goods made from wood and a large supply of native timber in tropical regions combined with development incentives from national governments have driven rapid growth in the forest products industry in many developing countries. Contract farming schemes have emerged as an important mechanism to ensure an adequate supply of raw timber for processing. These contracts also encourage secondary forest establishment, which is argued to reduce harvesting pressure on ecologically valuable native forests. We explore whether there exists a potential for efficiency gains within the forest products industry given the current installed capacity in the state of Andhra Pradesh, India. We estimate a stochastic production frontier function for this industry based on Annual Survey of Industries data from 2010 to 2013. We present evidence that there is space for efficiency gains and that the marginal value product of wood as a raw input is high enough to justify the engagement of companies and farmers in wood supply agreements as a means to reduce pressure on native forests.

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