Enforcement-proof contracts with moral hazard in precaution: ensuring 'permanence' in carbon sequestration
AbstractOpportunistic behaviour due to imperfect contract enforcement is a risk in many economic transactions. In this paper, an enforcement-proof incentive contract is developed in which a buyer demands a guaranteed delivery of a good or service given a productive upfront payment, moral hazard in precaution, and the potential for opportunistic contract breach. Investing in a contract upfront is found to be restricted by moral hazard and opportunistic contract breach. This limits the size of investment up to a specific level even if an infinite scale-up of production were beneficial. A more severe moral hazard problem results in a smaller distortion. The framework is applied and extended to international carbon sequestration contracts. In comparison to alternative liability attributions, the current regime of buyer liability yields inefficiently low levels of investment in carbon sequestration. Copyright 2012 Oxford University Press 2011 All rights reserved, Oxford University Press.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Oxford University Press in its journal Oxford Economic Papers.
Volume (Year): 64 (2012)
Issue (Month): 2 (April)
Contact details of provider:
Postal: Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK
Fax: 01865 267 985
Web page: http://oep.oupjournals.org/
Other versions of this item:
- Ian A. MacKenzie & Markus Ohndorf & Charles Palmer, 2010. "Enforcement-proof contracts with moral hazard in precaution: ensuring ‘permanence’ in carbon sequestration," Grantham Research Institute on Climate Change and the Environment Working Papers 27, Grantham Research Institute on Climate Change and the Environment.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Thomas, J. & Worrall, T., 1990.
"Foreign Direct Investment And The Risk Of Expropriation,"
The Warwick Economics Research Paper Series (TWERPS)
342, University of Warwick, Department of Economics.
- Thomas, Jonathan & Worrall, Tim, 1994. "Foreign Direct Investment and the Risk of Expropriation," Review of Economic Studies, Wiley Blackwell, vol. 61(1), pages 81-108, January.
- Thomas, J. & Worrall, T., 1991. "Foreign direct investment and the risk of expropriation," Discussion Paper 1991-26, Tilburg University, Center for Economic Research.
- Thomas, J. & Worral, T., 1991. "Foreign Direcyt Investment and the Risk of Expropriation," Papers 9126, Tilburg - Center for Economic Research.
- Thomas, Jonathan & Worrall, Tim, 1990. "Foreign direct investment and the risk of expropriation," Kiel Working Papers 411, Kiel Institute for the World Economy.
- Wu, JunJie & Babcock, Bruce A., 1995.
"Optimal Design of a Voluntary Green Payment Program Under Asymmetric Information,"
Staff General Research Papers
843, Iowa State University, Department of Economics.
- Wu, JunJie & Babcock, Bruce A., 1995. "Optimal Design Of A Voluntary Green Payment Program Under Asymmetric Information," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 20(02), December.
- JunJie Wu & Bruce A. Babcock, 1995. "Optimal Design of a Voluntary Green Payment Program Under Asymmetric Information," Center for Agricultural and Rural Development (CARD) Publications 95-wp131, Center for Agricultural and Rural Development (CARD) at Iowa State University.
- Eva Lövbrand & Teresia Rindefjäll & Joakim Nordqvist, 2009. "Closing the Legitimacy Gap in Global Environmental Governance? Lessons from the Emerging CDM Market," Global Environmental Politics, MIT Press, vol. 9(2), pages 74-100, May.
- von Thadden, Ernst-Ludwig, 1995. "Long-Term Contracts, Short-Term Investment and Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 557-75, October.
- M. L. Weitzman, 1978.
"Optimal Search for the Best Alternative,"
214, Massachusetts Institute of Technology (MIT), Department of Economics.
- Feder, Gershon & Feeny, David, 1991. "Land Tenure and Property Rights: Theory and Implications for Development Policy," World Bank Economic Review, World Bank Group, vol. 5(1), pages 135-53, January.
- Patrick Bolton & Mathias Dewatripont, 2005.
MIT Press Books,
The MIT Press,
edition 1, volume 1, number 0262025760.
- Basu, Kaushik, 1992. "Limited liability and the existence of share tenancy," Journal of Development Economics, Elsevier, vol. 38(1), pages 203-220, January.
- Rauch, James E., 1999.
"Networks versus markets in international trade,"
Journal of International Economics,
Elsevier, vol. 48(1), pages 7-35, June.
- Andersen,Lykke E. & Granger,Clive W. J. & Reis,Eustaquio J. & Weinhold,Diana & Wunder,Sven, 2002. "The Dynamics of Deforestation and Economic Growth in the Brazilian Amazon," Cambridge Books, Cambridge University Press, number 9780521811972.
- Michael Dutschke, 2002. "Fractions of permanence – Squaring the cycle of sink carbon accounting," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 7(4), pages 381-402, December.
- Pablo C. Ben�tez & Timo Kuosmanen & Roland Olschewski & G. Cornelis van Kooten, 2006.
"Conservation Payments under Risk: A Stochastic Dominance Approach,"
American Journal of Agricultural Economics,
Agricultural and Applied Economics Association, vol. 88(1), pages 1-15.
- Pablo Benítez & Timo Kuosmanen & Roland Olschewski & G. Cornelis van Kooten, 2004. "Conservation Payments under Risk: A Stochastic Dominance Approach," Working Papers 2004-05, University of Victoria, Department of Economics, Resource Economics and Policy Analysis Research Group.
- Pablo Benítez & Timo Kuosmanen & Roland Olschewski & G. Cornelis van Kooten, 2005. "Conservation Payments under Risk: A Stochastic Dominance Approach," Working Papers 2005-14, University of Victoria, Department of Economics, Resource Economics and Policy Analysis Research Group.
- Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
- Eswaran, Mukesh & Kotwal, Ashok, 1985. "A Theory of Contractual Structure in Agriculture," American Economic Review, American Economic Association, vol. 75(3), pages 352-67, June.
- Hatzis, Aristides N., 2002. "Having the cake and eating it too: efficient penalty clauses in Common and Civil contract law," International Review of Law and Economics, Elsevier, vol. 22(4), pages 381-406, December.
- Atkeson, Andrew, 1991.
"International Lending with Moral Hazard and Risk of Repudiation,"
Econometric Society, vol. 59(4), pages 1069-89, July.
- Andrew Atkeson, 2010. "International lending with moral hazard and risk of repudiation," Levine's Working Paper Archive 200, David K. Levine.
- Kim, Man-Keun & McCarl, Bruce A. & Murray, Brian C., 2008. "Permanence discounting for land-based carbon sequestration," Ecological Economics, Elsevier, vol. 64(4), pages 763-769, February.
- Engel, Stefanie & Pagiola, Stefano & Wunder, Sven, 2008. "Designing payments for environmental services in theory and practice: An overview of the issues," Ecological Economics, Elsevier, vol. 65(4), pages 663-674, May.
- Ben Groom & Pauline Grosjean & Andreas Kontoleon & Tim Swanson & Shiqiu Zhang, 2008. "Relaxing Rural Constraints: a ‘Win-Win’ Policy for Poverty and Environment in China?," Environmental Economy and Policy Research Working Papers 30.2008, University of Cambridge, Department of Land Economics, revised 2008.
- Blasch, Julia & Farsi, Mehdi, 2012.
"Retail demand for voluntary carbon offsets – a choice experiment among Swiss consumers,"
41259, University Library of Munich, Germany.
- Julia Blasch & Mehdi Farsi, 2012. "Retail demand for voluntary carbon offsets - A choice experiment among Swiss consumers," IED Working paper 12-18, IED Institute for Environmental Decisions, ETH Zurich.
- Stefanie Engel & Charles Palmer & Luca Taschini & Simon Urech, 2012. "Cost-effective payments for reducing emissions from deforestation under uncertainty," Grantham Research Institute on Climate Change and the Environment Working Papers 72, Grantham Research Institute on Climate Change and the Environment.
- Suzi Kerr, 2012. "The Economics of International Policy Agreements to Reduce Emissions from Deforestation and Degradation," Working Papers 12_12, Motu Economic and Public Policy Research.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press) or (Christopher F. Baum).
If references are entirely missing, you can add them using this form.