Optimal Fiscal Decentralization and Incentive-Compatible Monitoring for Dual Public Goods: Forest Carbon Sinks and Water Retention

Haiwen Long ()
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Haiwen Long: Yuxi Normal University, Business School

A chapter in Proceedings of the 2026 3rd International Conference on Applied Economics, Management Science and Social Development (AEMSS 2026), 2026, pp 493-502 from Springer

Abstract: Abstract Forest ecosystems provide dual public goods of carbon sequestration and water conservation, yet optimal fiscal allocation mechanisms under multi-attribute public goods remain under-explored. This study constructs a principal-agent model incorporating asymmetric information and moral hazard to analyze the optimal fiscal allocation rights and incentive-compatible supervision mechanisms. The theoretical framework demonstrates that when forest ecosystems simultaneously produce carbon sequestration and water conservation services, the optimal fiscal transfer contract should incorporate performance-based incentives contingent on observable outcome indicators. The model derives closed-form solutions for optimal effort levels, supervision intensity, and fiscal allocation ratios under different information structures. Key findings indicate that: (1) dual-attribute public goods require differentiated incentive intensities based on measurement costs; (2) the optimal supervision probability increases with the divergence between social and private benefits; (3) fiscal decentralization with proper incentive alignment can achieve second-best efficiency. This research provides theoretical foundations for designing ecological compensation policies in the context of “dual carbon” goals and water security strategies.

Keywords: forest carbon sequestration; water conservation; public goods; fiscal allocation; principal-agent model; incentive compatibility; ecological compensation (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advbcp:978-94-6239-672-2_47

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DOI: 10.2991/978-94-6239-672-2_47

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