Cordero Salas, Paula2013-09-262013-09-262013-06https://hdl.handle.net/10986/15862Reduction of carbon emissions from deforestation and forest degradation has been identified as a cost effective element of the post-Kyoto strategy to achieve long-term climate objectives. Its success depends primarily on the design and implementation of a financial mechanism that provides land-holders sufficient incentives to participate in such scheme. This paper proposes self-enforcing contracts (relational contracts) as a potential solution for the constraints in formal contract enforcement derived from the stylized facts of the implementation because relational contracting relies upon mutual private self-enforcement in a repeated transaction framework. The paper derives an opportunity cost function for land use and characterizes the optimal self-enforcing contract as well as provide the parameters under which private enforcement is sustainable. The optimal payment scheme suggests that all payments should be made contingent on the carbon offsets delivered, that is, at the end of the contracting period. Thus, the optimal contract does not observe any ex ante payment. Self-enforcement is more difficult to sustain the higher the opportunity cost of forest conservation is relative to the value of the carbon offsets from the contract. Necessary extensions to the relational contracting model are also discussed.en-USCC BY 3.0 IGOADVERSE SELECTIONAGRICULTUREATMOSPHEREBIODIVERSITYBIODIVERSITY CONSERVATIONCARBONCARBON CREDITSCARBON DIOXIDECARBON EMISSIONCARBON EMISSIONSCARBON EMISSIONS FROM DEFORESTATIONCARBON MARKETCARBON OFFSETSCARBON REDUCTIONSCARBON SEQUESTRATIONCARBON SINKCARBON SINKSCARBON STOCKCARBON STOCKSCARBON STORAGECENTER FOR INTERNATIONAL FORESTRY RESEARCHCLIMATECLIMATE CHANGECLIMATE CHANGE MITIGATIONCOCO2COMPETITIVE MARKETCONSERVATION OF CARBONCONTRACT DESIGNCONTRACT ENFORCEABILITYCONTRACT ENFORCEMENTCREDIT BUYERDEVELOPED COUNTRIESDEVELOPING COUNTRIESDEVELOPING COUNTRYDISCOUNT RATEECONOMIC ACTIVITYECONOMIC DEVELOPMENTECONOMIC RENTSECONOMICSECOSYSTEMSEMISSION REDUCTIONEMISSION REDUCTION TARGETSEMISSIONSEMISSIONS FROM DEFORESTATIONEMISSIONS LIMITSEMISSIONS REDUCTIONSEMPIRICAL ANALYSISENFORCEABILITYENFORCEABLE CONTRACTSENFORCEMENT MECHANISMENFORCEMENT MECHANISMSENFORCEMENT OF CONTRACTSENFORCEMENT REGIMESENVIRONMENTALENVIRONMENTAL BENEFITSENVIRONMENTAL QUALITYENVIRONMENTAL SERVICESENVIRONMENTSEQUILIBRIUMFINANCIAL SUPPORTFORESTFOREST ACTIVITIESFOREST ACTIVITYFOREST CARBONFOREST CARBON SINKSFOREST CONSERVATIONFOREST DEGRADATIONFOREST LANDFOREST PROTECTIONFOREST STOCKSFORESTRYFORESTRY PRODUCTSFORESTRY PROJECTSFORESTSFRAMEWORK CONVENTION ON CLIMATE CHANGEGHGGLOBAL CLIMATE CHANGEGLOBAL FORESTGREENHOUSEGREENHOUSE GASGREENHOUSE GAS EMISSIONSGREENHOUSE GAS MITIGATIONINCENTIVE COMPATIBILITY CONSTRAINTINCENTIVE COMPATIBILITY CONSTRAINTSINTERNATIONAL BANKINTERNATIONAL FORESTRY RESEARCHINVOLUNTARY UNEMPLOYMENTLAND AREALAND HOLDERSLAND OWNERLAND OWNERSLAND USELAND USESLAND-USELAND-USE CHANGELANDHOLDERLEGAL SYSTEMSLOCAL GOVERNMENTSMARGINAL BENEFITSMARGINAL COSTMORAL HAZARDOPPORTUNITY COSTOPTIMAL CONTRACTPERFECT INFORMATIONPRESENT VALUEPRINCIPAL-AGENT PROBLEMSPRIVATE ENFORCEMENTREDUCING EMISSIONSREFORESTATIONRENEGOTIATIONRETURNRETURNSSIDE PAYMENTSSOCIALLY SUSTAINABLE DEVELOPMENTSUSTAINABLE DEVELOPMENTTEMPERATURETERMS OF TRADETIMBERTIMBER HARVESTINGTRADINGTRANSACTIONTRUST FUNDVALUATIONWATERSHEDWILLINGNESS TO PAYWorld Bank10.1596/1813-9450-6503