Climate Finance as a Principal-Agent Problem

• In Event: Climate Change and Development

Abstract

Climate finance constitutes a principal-agent problem. The funder state and builder state must work together on climate change mitigation projects despite diverging information and interests about what counterfactual investment is being replaced. This paper develops new theory on the tension between donor and recipient preferences over the three possible counterfactual investments (brown, green, and none). While donor states prefer financing to replace brown investments, recipient states seek financing to replace green investments or no investment. After adjusting for non-random selection with weighting and matching techniques, I test this hypothesis on project applications to the Clean Development Mechanism. This work generates both practical recommendations for the rapidly growing use of climate finance and opportunities for future research on climate finance as a cooperation dilemma in international relations.

Author

• Samuel Houskeeper, Princeton University