Environmental regulation and bail outs under weak state capacity: Deforestation in the Brazilian Amazon.

This paper assesses the effects of a bail out on deforestation in the Brazilian Amazon following a revision in the Forest Code. By providing a bail out to landowners with illegal deforestation, the New Forest Code has created incentives for law-abiding landowners to engage in deforestation activities as well, in the expectation of receiving future amnesties. To identify causal effects, we explore a rich dataset at the property level and use a difference-in-differences strategy, where former law-abiders are our treatment group. In our preferred econometric specification, the private rural properties in the treated group are associated with a rate of forest loss 0.457 p.p. higher than would prevail in the absence of the law revision. This amounts to an accumulated loss of nearly 1 million hectares of forest between 2012 and 2017. This is equivalent to a US$ 2.4 billion loss when no more than carbon emissions are considered. [ABSTRACT FROM AUTHOR]