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Liquidity Constraints and Deforestation: The Limitations of Payments for Ecosystem Services

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  • Seema Jayachandran

Abstract

A popular environmental policy is to pay forest owners for avoiding deforestation on their land. This is an example of "payments for ecosystem services" (PES). This paper shows that liquidity constraints can limit the effectiveness of PES programs. If an individual would have cut down trees to sell them, his opportunity costs are more front-loaded than the stream of PES income. If credit constrained, he might decline the program even if the net present value (NPV) of the PES income exceeds the NPV of his opportunity costs. I present evidence consistent with this prediction using data on forest owners in Uganda.

Suggested Citation

  • Seema Jayachandran, 2013. "Liquidity Constraints and Deforestation: The Limitations of Payments for Ecosystem Services," American Economic Review, American Economic Association, vol. 103(3), pages 309-313, May.
  • Handle: RePEc:aea:aecrev:v:103:y:2013:i:3:p:309-13
    Note: DOI: 10.1257/aer.103.3.309
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    File URL: http://www.aeaweb.org/aer/ds/may2013/P2013_4362_ds.zip
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    References listed on IDEAS

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    1. Paul J. Ferraro & R. David Simpson, 2002. "The Cost-Effectiveness of Conservation Payments," Land Economics, University of Wisconsin Press, vol. 78(3), pages 339-353.
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    Citations

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    Cited by:

    1. Jayachandran, Seema & Laat, Joost de & Lambin, Eric F. & Stanton, Charlotte, 2016. "Cash for Carbon: A Randomized Controlled Trial of Payments for Ecosystem Services to Reduce Deforestation," CEPR Discussion Papers 11349, C.E.P.R. Discussion Papers.
    2. Gwenole Le Velly & Alexandre Sauquet & Sergio Cortina-Villar, 2015. "PES Impact and Leakages over Several Cohorts: The Case of PSA-H in Yucatan, Mexico," Working Papers halshs-01228371, HAL.
    3. repec:eee:ecolec:v:142:y:2017:i:c:p:214-227 is not listed on IDEAS
    4. Palmer, Charles & Taschini, Luca & Laing, Timothy, 2017. "Getting more ‘carbon bang’ for your ‘buck’ in Acre State, Brazil," Ecological Economics, Elsevier, vol. 142(C), pages 214-227.
    5. repec:eee:ecoser:v:31:y:2018:i:pa:p:208-218 is not listed on IDEAS
    6. Donna, Javier & Espin-Sanchez, Jose, 2014. "The Illiquidity of Water Markets," MPRA Paper 55078, University Library of Munich, Germany.
    7. repec:eee:wdevel:v:99:y:2017:i:c:p:498-517 is not listed on IDEAS
    8. repec:eee:wdevel:v:96:y:2017:i:c:p:359-374 is not listed on IDEAS
    9. repec:eee:ecolec:v:149:y:2018:i:c:p:48-61 is not listed on IDEAS
    10. Alix-Garcia, Jennifer & Wolff, Hendrik, 2014. "Payment for Ecosystem Services from Forests," IZA Discussion Papers 8179, Institute for the Study of Labor (IZA).

    More about this item

    JEL classification:

    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q23 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Forestry
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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