Abstract

Supply-chain regulations often depend on the liability imposed on downstream actors. When this is weakened, new incentives for illegal behavior may be transmitted upstream along the supply chain, potentially generating negative externalities. Here we study a policy reform in Brazil that introduced a “good-faith” principle for gold-purchasing establishments and relaxed the obligation to verify the legal origin of gold. We quantify how this reduced liability contributed to mining-driven deforestation in Indigenous Lands in the Brazilian Amazon. Leveraging spatial variation in gold deposits across these territories, where mining is prohibited, we employ a difference-in-differences approach to compare areas with high versus low exposure to potential gold mining before and after the reform. Our estimates attribute 62% of total observed deforestation in our sample to the policy reform. Further suggestive evidence indicates that land grabbing and the expansion of mining activity are the main mechanisms driving the deforestation effect.

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