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Contagious development: neighbors' interactions in deforestation

Juan A. Robalino, Alexander Pfaff

[May 2006]

Abstract: We estimate the effects of neighbors’ deforestation actions on individuals’ deforestation decisions in Costa Rica. To address simultaneity and the presence of spatially correlated unobservable factors, we instrument for neighboring deforestation using topographic and biological characteristics of neighboring parcels. We find evidence that neighboring deforestation significantly raises the probability that an individual clears a parcel. This finding is important for projecting the amount and the spatial pattern of forest. It implies that policies which promote agricultural development or forest conservation in a specific area also affect deforestation rates in non-targeted neighboring areas. Moreover, positive interactions create conditions in which multiple equilibria might arise. This could justify intervention to reach Pareto dominant outcomes.