Abstract:-

The success of tree plantation contracts for carbon sequestration depends on the compliance of the winners of the contracts. We introduce a penalty and bonus incentive (contingent payment) in a tree plantation contract to address the problem of non-compliance in the context of tree plantation contracts allocated by a sealed-bid reverse auction. We evaluate both theoretically and empirically the contingent payment’s impact on farmland owners’ willingness to accept (WTA) compensation to use their land for tree plantations instead of crop cultivation. Empirically, we use a framed field experiment in the Bundelkhand region of India. We design a reverse auction to decide the winning bid. Our findings indicate that the average bid in the contingent contract treatment is significantly higher than in the non-contingent contract treatment. Furthermore, bidders in the contingent contract treatment attach greater importance to avoiding penalties than gaining bonuses. A contract incorporating contingent payments offers the potential for higher tree survival rates and increased carbon storage at a lower overall cost compared to a contract without contingent payments.