Protected areas, local governments, and strategic interactions: The case of the ICMS-Ecológico in the Brazilian state of Paraná

- The ICMS-Ecológico is a fiscal transfer mechanism implemented to reduce biodiversity loss in Brazil.
- The mechanism rewards municipalities for the creation and management of protected areas.
- The effectiveness of this mechanism is tested through the presence of interactions among municipalities.
- From a Bayesian spatial Tobit model, we find strategic substitutability in municipalities' conservation decisions.
- This result raises implications for the design of the mechanism and its impact on the reduction of biodiversity loss.

Various conservation initiatives have been implemented in developing countries with increasing involvement on the part of local governments. A concern in entrusting decisions to local governments is that the effectiveness of the conservation instrument can be threatened by interactions among these local governments. We examine this concern with respect to an ecological fiscal transfer mechanism, the ICMS-Ecológico, implemented in Brazil in the early 1990's in order to reduce biodiversity loss. The mechanism enables states to reward municipalities for the creation and management of protected areas. We describe this mechanism, present a conceptual framework aimed at understanding the potential sources and consequences of interactions among local governments on the effectiveness of a decentralized mechanism aimed at promoting the creation of protected areas, and propose an empirical application using a Bayesian spatial Tobit model. Our empirical investigation on the creation of protected areas in the state of Paraná between 2000 and 2010 reveals strategic substitutability in municipalities' conservation decisions. This finding also leads us to discuss the issue of identification of a negative spatial lag coefficient when there is a positive spatial error correlation.