Background Research Questions Contracting for conservation Deforestation and Conservation Contracts B˚ ard Harstad and Torben Mideksa April 9, 2014
Background Research Questions Contracting for conservation Overview Background 1 Research Questions 2 Contracting for conservation 3 Conservation Contracts Two drivers of deforestation Contracting with regional governments
Background Research Questions Contracting for conservation Tropical Rainforests
Background Research Questions Contracting for conservation Research questions 1 How does legal and illegal deforestation interact?
Background Research Questions Contracting for conservation Research questions 1 How does legal and illegal deforestation interact? 2 Following REDD-contracts, how does legal/illegal deforestation change in target/neighboring countries?
Background Research Questions Contracting for conservation Research questions 1 How does legal and illegal deforestation interact? 2 Following REDD-contracts, how does legal/illegal deforestation change in target/neighboring countries? 3 How should contracts be designed,
Background Research Questions Contracting for conservation Research questions 1 How does legal and illegal deforestation interact? 2 Following REDD-contracts, how does legal/illegal deforestation change in target/neighboring countries? 3 How should contracts be designed, given that deforestation may be either illegal or controlled by the local governments?
Background Research Questions Contracting for conservation Research questions 1 How does legal and illegal deforestation interact? 2 Following REDD-contracts, how does legal/illegal deforestation change in target/neighboring countries? 3 How should contracts be designed, given that deforestation may be either illegal or controlled by the local governments? when there is leakage, i.e., that one country/district may log more when the neighbor log less?
Background Research Questions Contracting for conservation Research questions 1 How does legal and illegal deforestation interact? 2 Following REDD-contracts, how does legal/illegal deforestation change in target/neighboring countries? 3 How should contracts be designed, given that deforestation may be either illegal or controlled by the local governments? when there is leakage, i.e., that one country/district may log more when the neighbor log less? 4 Whenever possible, is contracting at top level better than contracting at lower hierarchies of a decentralized state?(in progress)
Background Research Questions Contracting for conservation Definition: Conservation Contracts The most popular contractual form is to pay developing countries for performance i.e. for avoided deforestation relative to the baseline or BAU deforestation. The REDD contract is thus P pays each agent: T i = max { t i (¯ x i − x i ) , 0 } (1)
Background Research Questions Contracting for conservation Economic Model of Tropical Deforestation Two drivers of tropical deforestation:
Background Research Questions Contracting for conservation Economic Model of Tropical Deforestation Two drivers of tropical deforestation: Sales of concessions,(perfect control by government)
Background Research Questions Contracting for conservation Economic Model of Tropical Deforestation Two drivers of tropical deforestation: Sales of concessions,(perfect control by government) Illegal logging,(imperfect control by government)
Background Research Questions Contracting for conservation Economic Model of Tropical Deforestation Two drivers of tropical deforestation: Sales of concessions,(perfect control by government) Illegal logging,(imperfect control by government) Agents : 1 Principal (donor) from north,
Background Research Questions Contracting for conservation Economic Model of Tropical Deforestation Two drivers of tropical deforestation: Sales of concessions,(perfect control by government) Illegal logging,(imperfect control by government) Agents : 1 Principal (donor) from north, 2 Central/Regional governments in south (A and B or i and j ),
Background Research Questions Contracting for conservation Economic Model of Tropical Deforestation Two drivers of tropical deforestation: Sales of concessions,(perfect control by government) Illegal logging,(imperfect control by government) Agents : 1 Principal (donor) from north, 2 Central/Regional governments in south (A and B or i and j ), 3 Illegal loggers in south (very large in number)
Background Research Questions Contracting for conservation Preferences Region i’s: u i = px i , s − ce 2 i + t i max { 0 , x i − x i } − v i x i , (2)
Background Research Questions Contracting for conservation Preferences Region i’s: u i = px i , s − ce 2 i + t i max { 0 , x i − x i } − v i x i , (2) x i = x i , s + x i , n , (3) x s = x i , s + x j , s , x n = x i , n + x j , n , x = x i + x j = x n + x s .
Background Research Questions Contracting for conservation Preferences Region i’s: u i = px i , s − ce 2 i + t i max { 0 , x i − x i } − v i x i , (2) x i = x i , s + x i , n , (3) x s = x i , s + x j , s , x n = x i , n + x j , n , x = x i + x j = x n + x s . Central government’s u c ≡ u i + u j
Background Research Questions Contracting for conservation Preferences Illegal loggers: u IL = px i , n − e i x i , n − hx 2 i , n
Background Research Questions Contracting for conservation Preferences Illegal loggers: u IL = px i , n − e i x i , n − hx 2 i , n Donor’s utility function X u D = − d ( x A , x B ) − t i max { 0 , x i − x i } . (4) i ∈ { A , B }
Background Research Questions Contracting for conservation Market and illegal logging p = a − bx , (5)
Background Research Questions Contracting for conservation Market and illegal logging p = a − bx , (5) zero-profit condition, for illegal loggers, on the margin: p − e i − hx i , n = 0 (6)
Background Research Questions Contracting for conservation Market and illegal logging p = a − bx , (5) zero-profit condition, for illegal loggers, on the margin: p − e i − hx i , n = 0 (6) Proposition 1 Illegal logging: The amount of illegal logging in a region decreases in the region’s policing, increases in the other region’s policing, and decreases in both regions’ sales: x i , n = ah − bx s h − e i ( h + b ) + be j h 2 + 2 bh
Background Research Questions Contracting for conservation Decentralization: Contracting with regional governments Proposition 2 Policing: Taking sales as given, a district polices more if it sells more (since then it is more important to get a high price) and if v i is large. The policing e ff ort is independent of the other district’s policies or v j : e i = x i , s b ✓ v i + t i ◆ h + b h + 2 b + (7) 2 c 2 c h ( h + 2 b )
Background Research Questions Contracting for conservation Decentralization: Contracting with regional governments Proposition 2 Policing: Taking sales as given, a district polices more if it sells more (since then it is more important to get a high price) and if v i is large. The policing e ff ort is independent of the other district’s policies or v j : e i = x i , s b ✓ v i + t i ◆ h + b h + 2 b + (7) 2 c 2 c h ( h + 2 b ) Proposition 3 Sales: Taking the other policing as given, a district sells more if it, and/or the neighbor, polices more (since the price is then higher) and if v i is small while v j is large: ✓ h + b ◆ x i , s = a 3 b + e i + e j [( v i + t i ) − ( v j + t j )] . − 3 h 3 bh
Background Research Questions Contracting for conservation Subgame perfect allocations are: ah + ( h + b ) ( v i + t i + v j + t j ) p = 6 b − b / 2 h − b / 2 hc + 3 h ah + ( h + b ) ( v i + t i + v j + t j ) � a b − 1 x = b 3 h + 6 b − b / 4 ch ah + ( h + b ) ( v i + t i + v j + t j ) � 1 e i = 2 hc 3 h + 6 b − b / 4 ch ah + ( h + b ) ( v i + t i + v j + t j ) � (1 − 1 / 2 hc ) x i , n = h 3 h + 6 b − b / 4 ch ah + ( h + b ) ( v i + t i + v j + t j ) � ✓ h + 2 b v i + t i ) h + b x i , s = − bh 3 h + 6 b − b / 4 ch bh ✓ 2 h + 6 b − b / ch ◆ ah + ( h + b ) ( v i + t i + v j + t j ) � − ( v i + t i ) h + b x i = 2 bh 3 h + 6 b − b / 4 ch bh
Background Research Questions Contracting for conservation Proposition 4 If t i increases, x and x i , s decrease but x j , s increases. In addition, p, x i , n , x j , n , e i and e j increase in both districts. The leakage is large and | ∂ x / ∂ t i | is small if c is large: � ∂ x − 1 h + b = ∂ t i b 3 h + 6 b − b / 4 ch
Background Research Questions Contracting for conservation Proposition 4 If t i increases, x and x i , s decrease but x j , s increases. In addition, p, x i , n , x j , n , e i and e j increase in both districts. The leakage is large and | ∂ x / ∂ t i | is small if c is large: � ∂ x − 1 h + b = ∂ t i b 3 h + 6 b − b / 4 ch ∂ x j − 2 h + 6 b − b / ch ∂ x = ∂ t i > 0 ∂ t i 2 h
Background Research Questions Contracting for conservation Proposition 5 Externalities: Region i benefits from the neighbor’s larger x j , s and smaller e j if and only if a v i + t i > V ¯ ≡ 1 + 4 b / h − b / 4 ch 2
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