Abstract

This paper discusses theemergence ofmoral hazardbehavior in the context of a change in the Brazilian law that governs land use – the Forest Code. The Forest Code revision entailed benefits that relieved environmental liabilities for a specific groupof landowners. We argue that this has generated incentives for non-distressed agents to engage in deforestation activities in the expectation of future bail outs. We explore the fact that the Forest Code establishes two distinct legal regimes to landowners according to their fulfillment of to the previous law. Basically, those that were not abiding by the former law gained special conditions to regularize the environmental liabilities, whereas those that were in accordance with the law did not receive any benefits. Given the political power held by the rural sector, we argue that this structure of incentives led to a moral hazard behavior and was conducive to an increase in deforestation activities. We investigate our hypothesis using data on yearly deforestation from 2009 to 2017 by rural private properties in the Brazilian Legal Amazon. Using a difference in differences approach, we first show that the new Forest Code has had a significant impact on deforestation. Then,we extend the analysis to showthat there was no associated increase in agricultural activities. Finally,we conduct a counter-factual analysis and showthat the Forest Code revision led to an additional loss of 533 thousand hectares between 2012 and 2017, which represents a loss of US$ 1.3 billion considering only carbon emissions.

Keywords: Land regulation, Deforestation, Amazon

CO-author : Lucas Costa

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