Environmental Compliance, Governance and Deforestation in Developing Countries: Theory and Evidence

This paper analyses mechanisms underlying firm’s compliance with environmental regulations. By using a political economy approach through a Principal-Agent model, we examine how the dynamic of environmental compliance could affect governance infrastructures by shaping the structure of institutional incentives related to stakeholder’s behaviors in regulation process. Taking the case of deforestation issues in developing countries, we show that harvester’s incentives to comply with forest policies and efficiency of regulatory institutions are strongly in an interaction process as firms are incited to bypass rules by using bribe or others corruption tools. In turn, government’s incentives to design sustainable regulatory norms and efficient regulatory institutions are influenced in one hand by firm’s regulatory compliance, and in other hand by relative instability in the political framework notably through political corruption by lobbies. Empirical estimations, using cross section data for developing countries, are supporting main theoretical predictions. After having design a new indicator of petty corruption as well as a new indicator of environmental compliance, we find that more compliance decreases petty corruption while this effect is strengthened by judicial efficiency. Moreover, we show that environmental compliance affects positively judicial efficiency and reduces deforestation while this last effect is more likely in judicial efficient countries. These results highlight that stakeholders’ compliance (demand for good governance) is crucial in the process of sustainable institutional reforms and environmental performances.