Resource information
The success of reducing carbon emissions
from deforestation and forest degradation depends on the
design of an effective financial mechanism that provides
landholders sufficient incentives to participate and provide
additional and permanent carbon offsets. This paper proposes
self-enforcing contracts as a potential solution for the
constraints in formal contract enforcement derived from the
stylized facts of reducing emissions from deforestation and
forest degradation implementation in developing countries.
It characterizes the optimal self-enforcing contract and
provides the parameters under which private enforcement is
sustainable when the seller type that is, the opportunity
cost of the land, is private information. The optimal
contract suggests that the seller with low opportunity cost
receives a positive enforceable payment equivalent to the
information rents required for self-selection, in contrast
to when the buyer knows the seller type in which case all
payments should be made contingent on additional forest
conservation. When the buyer does not know the seller type,
a first-best self-enforcing contract can be implemented if
forest conservation is sufficiently productive. If the gains
from forest conservation are small, self-enforcing contracts
may induce some carbon sequestration by some or all seller
types, depending on the value of the shared gains of the relationship.
