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Abstract

We examine the use of performance bonds in tropical forest concessions. Bonds are a promising new policy instrument that have been discussed in several articles and used in some cases as a way of encouraging adoption of sustainable forest management practices, including reduced impact logging methods, and have been proposed due to apparent failures of traditional Pigouvian instruments. Our research examines the impact of three practical complications hindering the effective adoption of bonding schemes: harvester participation constraints, government repayment risk, and imperfect enforcement. By building a simple two-stage analytical model, we first highlight the role of participation constraints in the concession bond design problem. Model simulations are used to examine policy implications such as potential for REDD+ payments in improving the bonding outcomes, and how high these payments should be in order to guarantee full compliance with reduced impact logging.

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