Enforcement-proof contracts with moral hazard in precaution: ensuring ï¿½permanenceï¿½ in carbon sequestration
Opportunistic behaviour due to incomplete contract enforcement is a risk in many economic transactions such as forest carbon sequestration contracts. 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. The optimal design of forest carbon contracts to ensure permanence is derived. Buyer liability for loss of a carbon sink is shown to yield an ineficiently low level of sequestration. Yet it remains higher than the case where liability is neither allocated to the buyer nor the seller. Indexing contract prices to the sellerï¿½s opportunity costs potentially boosts the upfront investment as does shifting liability to the seller but not beyond first-best levels. Assigning liability is shown to have implications for forest carbon contracts in an international climate policy regime.
|Date of creation:||Sep 2010|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +44 (020) 7405 7686
Web page: http://www.lse.ac.uk/grantham.
More information through EDIRC
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.:
- 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.
- 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.P. & Worrall, T., 1991. "Foreign direct investment and the risk of expropriation," Discussion Paper 1991-26, Tilburg University, 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.
- Thomas, J. & Worral, T., 1991. "Foreign Direcyt Investment and the Risk of Expropriation," Papers 9126, Tilburg - Center for Economic Research.
- Patrick Bolton & Mathias Dewatripont, 2005.
MIT Press Books,
The MIT Press,
edition 1, volume 1, number 0262025760, June.
- Pablo Benítez & Timo Kuosmanen & Roland Olschewski & G. Cornelis van Kooten, 2004.
"Conservation Payments under Risk: A Stochastic Dominance Approach,"
2004-05, University of Victoria, Department of Economics, Resource Economics and Policy Analysis Research Group.
- 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, 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.
- James E. Rauch, 1996.
"Networks versus Markets in International Trade,"
NBER Working Papers
5617, National Bureau of Economic Research, Inc.
- M. L. Weitzman, 1978.
"Optimal Search for the Best Alternative,"
214, Massachusetts Institute of Technology (MIT), Department of Economics.
- 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.
- 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.
- Basu, Kaushik, 1992. "Limited liability and the existence of share tenancy," Journal of Development Economics, Elsevier, vol. 38(1), pages 203-220, January.
- Andrew Atkeson, 2010.
"International lending with moral hazard and risk of repudiation,"
Levine's Working Paper Archive
200, David K. Levine.
- Atkeson, Andrew, 1991. "International Lending with Moral Hazard and Risk of Repudiation," Econometrica, Econometric Society, vol. 59(4), pages 1069-89, July.
- 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.
- 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.
- 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.
- Ghatak, Maitreesh & Pandey, Priyanka, 2000. "Contract choice in agriculture with joint moral hazard in effort and risk," Journal of Development Economics, Elsevier, vol. 63(2), pages 303-326, December.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Adam Ozanne & Tim Hogan, 2001. "Moral hazard, risk aversion and compliance monitoring in agri-environmental policy," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 28(3), pages 329-348, October.
- Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
- repec:cup:cbooks:9780521811972 is not listed on IDEAS
When requesting a correction, please mention this item's handle: RePEc:lsg:lsgwps:wp27. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (The GRI Administration)
If references are entirely missing, you can add them using this form.