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Addressing additionality in REDD contracts when formal enforcement is absent, Volume 1
 
Author:Cordero Salas, Paula; Roe, Brian; Sohngen, Brent; Country:World;
Date Stored:2013/06/25Document Date:2013/06/01
Document Type:Policy Research Working PaperSubTopics:Common Property Resource Development; Climate Change Mitigation and Green House Gases; Debt Markets; Forestry; Contract Law
Language:EnglishRegion:The World Region
Report Number:WPS6502Collection Title:Policy Research working paper ; no. WPS 6502
Volume No:1  

Summary: The success of reducing carbon emissions from deforestation and forest degradation depends on the design of an effective financial mechanism that provides landholders sufficient incentives to participate and provide additional and permanent carbon offsets. This paper proposes self-enforcing contracts as a potential solution for the constraints in formal contract enforcement derived from the stylized facts of reducing emissions from deforestation and forest degradation implementation in developing countries. It characterizes the optimal self-enforcing contract and provides the parameters under which private enforcement is sustainable when the seller type that is, the opportunity cost of the land, is private information. The optimal contract suggests that the seller with low opportunity cost receives a positive enforceable payment equivalent to the information rents required for self-selection, in contrast to when the buyer knows the seller type in which case all payments should be made contingent on additional forest conservation. When the buyer does not know the seller type, a first-best self-enforcing contract can be implemented if forest conservation is sufficiently productive. If the gains from forest conservation are small, self-enforcing contracts may induce some carbon sequestration by some or all seller types, depending on the value of the shared gains of the relationship.

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