Certification schemes for forest products are understood by many as a way to promote sustainable resource use when it is impossible to rely on direct enforcement of process standards. Based on the concept of ‘Self-Enforcing Contracts’, this study develops a market model that simulates the simultaneous partial equilibrium for both certified wood units and physically identical units that are produced without observing certain ecological standards. By illustrating the interplay of supply and demand in a world characterised by incomplete information, opportunistic behaviour and free riding, the model simulations, along with some empirical evidence from tropical forestry, indicate that certification will very likely fall short of preventing degradation of tropical forests. This is especially true in politically and economically unstable situations. Consequently, institutions other than markets are needed to govern the way natural resources are used. The problem of tropical forest degradation must be resolved primarily through forest legislation and improved governance structures and not through eco-labelling.
