Enforcement-proof contracts with moral hazard and precaution: ensuring 'permanence' in carbon sequestration

MacKenzie, Ian A., Ohndorf, Markus and Palmer, Charles (2012) Enforcement-proof contracts with moral hazard and precaution: ensuring 'permanence' in carbon sequestration. Oxford Economic Papers, 64 2: 350-374. doi:10.1093/oep/gpr057


Author MacKenzie, Ian A.
Ohndorf, Markus
Palmer, Charles
Title Enforcement-proof contracts with moral hazard and precaution: ensuring 'permanence' in carbon sequestration
Journal name Oxford Economic Papers   Check publisher's open access policy
ISSN 0030-7653
1464-3812
Publication date 2012-04
Sub-type Article (original research)
DOI 10.1093/oep/gpr057
Volume 64
Issue 2
Start page 350
End page 374
Total pages 25
Place of publication Oxford, United Kingdom
Publisher Oxford University Press
Collection year 2013
Language eng
Abstract Opportunistic behaviour due to imperfect contract enforcement is a risk in many economic transactions. 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. Investing in a contract upfront is found to be restricted by moral hazard and opportunistic contract breach. This limits the size of investment up to a specific level even if an infinite scale-up of production were beneficial. A more severe moral hazard problem results in a smaller distortion. The framework is applied and extended to international carbon sequestration contracts. In comparison to alternative liability attributions, the current regime of buyer liability yields inefficiently low levels of investment in carbon sequestration.
Keyword Carbon sequestration
Environmental economics
Incomplete contracts
Direct investment
Q-Index Code C1
Q-Index Status Confirmed Code
Institutional Status Non-UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: Non HERDC
School of Economics Publications
 
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Created: Thu, 08 Nov 2012, 16:25:12 EST by Alys Hohnen on behalf of School of Economics