Contract design to sequester carbon in agricultural soils

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14 January 2014

According to several studies, agricultural carbon sequestration could be a relativelylow cost opportunity to mitigate greenhouse gas (GHG) concentration and a promis-ing means that could be institutionalised. However the potential for additional carbonquantities in agricultural soils is critical and comes from the agricultural Örms behav-iour with regards to land heterogeneity. In this paper, our aim is to set incentivemechanisms to enhance carbon sequestration by agricultural Örms. A policymaker hasto arrange incentives as agricultural Örms have private information and do not sponta-neously switch to the required practices. Moreover, a novelty in our paper is to show that the potential for additional carbon sequestration is similar to an exhaustible re-source. As a result, we construct an intertemporal principal-agent model with adverseselection. Our contribution is to specify contracts in order to induce truthful revela-tion by the Örms regarding their intrinsic characteristics towards carbon sequestration,while analytically characterizing the optimal path to sequester carbon as an exhaustibleresource.