†Institute for Environmental Decisions, ETH Zürich
‡Department of Geography and Environment, London School of Economics and Political Science (LSE), Houghton Street, London
WC2A 2AE; e-mail: c.palmer1{at}lse.ac.uk
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.
Disclaimer: Please note that abstracts for content published before 1996 were
created through digital scanning and may therefore not exactly
replicate the text of the original print issues. All efforts have
been made to ensure accuracy, but the Publisher will not be held
responsible for any remaining inaccuracies. If you require any
further clarification, please contact our
Customer Services Department.
