The Clean Development Mechanism (CDM) is a flexible carbon market mechanism managed by the United Nations. The program grants tradable carbon emissions credits (Certified Emission Reductions) for carbon-reducing projects in developing countries. A project can only be admitted to program if it is...

We examine how monitoring reduces incentives of companies to bias reported internal rates of return in CDM projects. These estimates serve as a criterion for admission into a United Nations program that grants tradable carbon emissions permits for carbon-reducing projects in developing...