Deforestation Slowdown in the Legal Amazon: Prices or Policies?

In this paper, we investigate the extent to which conservation policies have contributed to the recent deforestation slowdown in the Legal Amazon. The challenge is twofold. First, we need to disentangle the role of policies from potentially important price effects on deforestation. Second, we need to explore cross-sectional variation in our empirical setting in order to identify the effect of policies. Otherwise, we are not able to separate the effect of policies from other contemporaneous effects. As a starting point, we consider a conceptual framework in which a farmer decides whether or not to expand farmland beyond his landholding and thereby clear areas of forest, given a set of parameters regarding expected prices, policies, and technology. This framework suggests that conservation policies should be binding whenever the farmer faces a tight land constraint, that is, whenever optimal farmland size given prices and technology is larger than the farmer’s landholding. The tightness of the land constraint is influenced by land endowment and agricultural output prices.

Our conceptual framework has two main implications that guide our empirical analysis. First, it suggests that we should control for agricultural prices in order to evaluate the impact of conservation policies. Second, it indicates that the farmer’s response to policy stringency should depend on the tightness of the land constraints. This introduces cross-sectional variation in response to policy among different municipalities. Although not directly observed, the tightness of land constraints at the local level can be proxied by observed variables.