Conservation Contracts and Political Regimes

Abstract

Motivated by tropical deforestation, we analyze (i) a novel theory of resource ex-traction, (ii) the optimal conservation contract, (iii) the political regime preferred by the principal, and how this contrasts with the equilibrium regime.(i) This paper first presents a simple model where each country or district decides whether to exploit or protect its resource. There are multiple districts and a common market for the harvest. If districts are strong, in that they find protection inexpensive, exploitation is sales-driven and a district benefits if neighbors conserve more by selling less. Conversely, if districts are weak or exploitation illegal, a district loses when neighbors conserve since this raises the pressure and thus the protection costs. Consequently, centralizing political authority increases conservation if and only if districts are strong.(ii) We next study the problem of a donor designing conservation contracts(satisfying participation constraints and incentive constraints) and show how the equilibrium contract depends on the political regime. The equilibrium contract provides stronger incentives to conserve if districts are weak than if they are strong- the opposite of the first best. Thus, there is too much conservation if districts are weak, and too little when they are strong.(iii) Finally, we endogenize the political regime. Although contracting with the central authority is socially optimal, the donor benefits from contracting with districts if they are weak, since the negative externality from one district to another can be exploited by the donor. However, the presence of the donor can motivate the districts to centralize power when they are weak, or to decentralize if they are strong. This regime change harms the donor and the accompanying raise in deforestation may outweigh the effect of the contract itself.