MacKenzie, Ian A., Ohndorf, Markus and Palmer, Charles 
ORCID: 0000-0002-1252-179X
(2010)
Enforcement-proof contracts with moral hazard in precaution: ensuring ‘permanence’ in carbon sequestration.
Centre for Climate Change Economics and Policy and Grantham Research Institute on Climate Change and the Environment (27).
Centre for Climate Change Economics and Policy and Grantham Research Institute on Climate Change and the Environment, London, UK.
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Abstract
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 inefficiently 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 seller’s 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.
| Item Type: | Monograph (Working Paper) |
|---|---|
| Official URL: | http://www2.lse.ac.uk/GranthamInstitute/Home.aspx |
| Additional Information: | © 2010 The Authors |
| Divisions: | Geography & Environment Grantham Research Institute |
| Subjects: | G Geography. Anthropology. Recreation > GE Environmental Sciences H Social Sciences > HC Economic History and Conditions |
| JEL classification: | K - Law and Economics > K1 - Basic Areas of Law > K12 - Contract Law Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q1 - Agriculture > Q15 - Land Ownership and Tenure; Land Reform; Land Use; Irrigation |
| Date Deposited: | 16 Dec 2010 10:36 |
| Last Modified: | 13 Sep 2024 20:15 |
| URI: | http://eprints.lse.ac.uk/id/eprint/30846 |
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