by Suzi Kerr and Arthur van Benthem
- As part of international climate change policy, voluntary opt-in programs to reduce emissions in unregulated sectors or countries have spurred considerable discussion. Since any regulator will make errors in predicting baselines, adverse selection will reduce efficiency since participants will self-select into the program. In contrast, pure subsidies lead to full participation but require large financial transfers; this is a particular challenge across countries. A global social planner facing costless transfers would choose such a subsidy to maximize efficiency. However, any actual policy needs to be individually rational for both the buying (industrialized) and selling (developing) country. We present a simple model to analyze this trade-off between adverse selection and infra-marginal transfers.
van Benthem, A. and S. Kerr (2010). "Optimizing Voluntary Deforestation Policy in the Face of Adverse Selection and Costly Transfers." Motu Working Paper No. 10-04, Aug 2010.