Cooperation and Reciprocity in Carbon Sequestration Contracts

This paper studies the role of
cooperation and reciprocity on the structure of
self-enforcing carbon sequestration contracts. The optimal
contract is derived as a result of the optimizing actions of
purely self-interested agents, and agents that act according
to social or egoistic preferences. The analysis finds that
buyers' preferences do not affect contract structure
unless the buyer is averse to inequality. In contrast, the
optimal payment rule is directly related to the
seller's preferences as the payment must motivate the
seller to comply with forest conservation. It also finds
that the presence of altruistic or warm glow preferences
increases the likelihood of cooperation in the long-term
relationship relative to the case of selfish parties. These
results imply that agencies or organizations that are not
only concerned about carbon sequestration but also have
objectives related to the economic development of small land
holders may be more successful in the implementation
contracts to reduce emissions from deforestation and forest degradation.