Combining performance-based and action-based payments to provide environmental goods under uncertainty
AbstractPayments for environmental services (PES) are widely adopted to support the conservation of biodiversity and other environmental goods. Challenges that PES schemes have to tackle are (i) environmental uncertainty and (ii) information asymmetry between the provider of the service (typically a farmer) and the regulator. Environmental uncertainty calls for action-based payment schemes, because of the more favorable risk allocation if the farmer is risk-averse. Information asymmetry, on the other hand, calls for a performance-based payment, because of the more direct incentives for the farmer. Based on a principal-agent model, we study the optimal combination of both, performance-based and action-based payments under conditions of environmental uncertainty and asymmetric information. We find that for a risk-neutral regulator a combination is optimal in the majority of cases and that the welfare gain of the combined scheme over a pure action-based (performance-based) payment increases with information asymmetry (environmental uncertainty). We further show that for a regulator who is risk-averse against fluctuations in environmental goods provision the optimal performance-based payment is lower than for a risk-neutral regulator. We quantitatively illustrate our findings in a case study on the enhancement of the butterfly Scarce Large Blue (Maculinea teleius) in Landau/Germany.
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Bibliographic InfoArticle provided by Elsevier in its journal Ecological Economics.
Volume (Year): 85 (2013)
Issue (Month): C ()
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Web page: http://www.elsevier.com/locate/ecolecon
Conservation contracts; Payments for ecosystem services; Payments for environmental services; Biodiversity; Uncertainty;
Find related papers by JEL classification:
- Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
- Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy
- H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
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