Estimation Bias and Monitoring in Clean Development Mechanism Projects
48 Pages Posted: 23 Apr 2015 Last revised: 8 Sep 2016
Date Written: September 2, 2016
We examine how monitoring reduces incentives of companies to bias reported internal rates of return in CDM projects. These estimates serve as a criterion for admission into a United Nations program that grants tradable carbon emissions permits for carbon-reducing projects in developing countries. Consistent with our expectation, we find that reported rates of return, a key factor for admission to the program, tend to be downwardly biased and are negatively associated with the forecasted carbon reduction. However, monitoring from various sources mitigates some of the distorted incentives and related misreporting.
Keywords: Capital budgeting; Clean Development Mechanism (CDM); Auditing; Misreporting
JEL Classification: M41, Q28
Suggested Citation: Suggested Citation