Environmental regulation and bail outs under weak state capacity: Deforestation in the Brazilian Amazon11The authors gratefully acknowledge Antonio Ambrózio, Juliano Assunção, Arthur Bragança, Filipe Campante, André Chagas, Francisco Costa, Bard Harstad, Julie Subervie and Carlos Eduardo Young for insightful comments. We also thank seminar participants at the 41st Brazilian Econometric Society Meeting, 7th Economics of Low-Carbon Markets Workshop, the 5th CEDE Seminar, the 18th LAGV Conference, UFF, UERJ and CEE - Montpellier. The authors did not receive any financial support. The views expressed here are those of the authors alone and do not necessarily reflect those of the Brazilian Development Bank

This paper assesses the effects of a bail out on deforestation in the Brazilian Amazon following a revision in the Forest Code. By providing a bail out to landowners with illegal deforestation, the New Forest Code has created incentives for law-abiding landowners to engage in deforestation activities as well, in the expectation of receiving future amnesties. To identify causal effects, we explore a rich dataset at the property level and use a difference-in-differences strategy, where former law-abiders are our treatment group. In our preferred econometric specification, the private rural properties in the treated group are associated with a rate of forest loss 0.457 p.p. higher than would prevail in the absence of the law revision. This amounts to an accumulated loss of nearly 1 million hectares of forest between 2012 and 2017. This is equivalent to a US$ 2.4 billion loss when no more than carbon emissions are considered.