Agricultural use of fire in the Brazilian Amazon: Assessing the role of neighborhood effects

This paper aims (1) to build a theoretical model, based on the theory of externalities, that describes how the risk of losing control over fire can make the private net benefit of using it to convert land for agriculture differ from the social net benefit; and (2) to test the hypothesis that such a discrepancy can lead neighboring farmers to engage in Coasian agreements from which result the (at least partial) internalization of the risk imposed on land areas belonging to others. Simultaneity and omitted variable biases coming from interdependencies between land use decisions and fire use decisions are addressed with instrumental variables. Data comprises geo-referenced farm boundaries, fire detections reported by MODIS satellite sensor and a land use map for the Paragominas municipality in the Brazilian Amazon. No evidence of internalization is found. As a complementary finding, own-areas under risk exert significant and negative effect on the likelihood of fire use. Transaction costs seem to be preventing neighboring farmers to engage on institutional arrangements for the sharing of accidental fire risk. The choice of locations to be treated with fire remains individualistic, and, thus, suboptimal from the social standpoint. WP53