International transfers, price uncertainty and tropical deforestation

International transfers to developing countries are sometimes advocated on the ground that they contribute to tropical forest conservation. Here we demonstrate that the effectiveness (and attractiveness) of this instrument is reduced if the restrictive assumption of deterministic prices is relaxed. With stochastic prices, the steady-state forest stock in the absence of transfers is greater, implying that the marginal benefit of additional hectares conserved is less. In addition, the ‘wealth effect’ of transfers counteracts the ‘freeing-up effect’, which implies that per unit of subsidy fewer hectares of tropical forest are protected. Both effects reduce the attractiveness of transfers as a policy instrument for Western governments to combat tropical deforestation.(This abstract was borrowed from another version of this item.)