Estimation Bias and Monitoring in Clean Development Mechanism Projects

48 Pages Posted: 23 Apr 2015 Last revised: 8 Sep 2016

See all articles by Hui Chen

Hui Chen

University of Zurich

Peter Letmathe

RWTH Aachen University; University of Siegen - Faculty of Economics and Management Science

Naomi S. Soderstrom

University of Melbourne

Date Written: September 2, 2016

Abstract

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

Chen, Hui and Letmathe, Peter and Soderstrom, Naomi S., Estimation Bias and Monitoring in Clean Development Mechanism Projects (September 2, 2016). Available at SSRN: https://ssrn.com/abstract=2597443 or http://dx.doi.org/10.2139/ssrn.2597443

Hui Chen

University of Zurich ( email )

Plattenstrasse 14
Zurich, CH-8032
Switzerland

Peter Letmathe

RWTH Aachen University ( email )

Templergraben 64
Aachen, 52062
Germany

University of Siegen - Faculty of Economics and Management Science ( email )

Hoelderlinstr. 3
Siegen, 57072
Germany

Naomi S. Soderstrom (Contact Author)

University of Melbourne ( email )

Victoria
Melbourne, 3010
Australia

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