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Time inconsistent resource conservation contracts

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  • Gulati, Sumeet
  • Vercammen, James

Abstract

Are commonly observed resource conservation contracts efficient? In this paper we construct a model that embodies common characteristics of resource contracts. Using this model, we analyze a large class of real-world resource contracts and find them to be economically inefficient. This inefficiency stems from a time inconsistency inherent in these contracts. There are two possible ways to overcome this time inconsistency. The first is to employ a sufficiently large penalty for early termination of the contract. The second and possibly easier method is to offer an upward sloping conservation payment schedule so far overlooked by resource contracts. Under this payment schedule, the agent's ex-ante and ex-post contract choices coincide, social externalities are fully internalized, and the contractual outcome is economically efficient even in the absence of a penalty for early termination.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 52 (2006)
Issue (Month): 1 (July)
Pages: 454-468

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Handle: RePEc:eee:jeeman:v:52:y:2006:i:1:p:454-468

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Web page: http://www.elsevier.com/locate/inca/622870

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  1. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  2. Antle, John & Capalbo, Susan & Mooney, Sian & Elliott, Edward & Paustian, Keith, 2003. "Spatial heterogeneity, contract design, and the efficiency of carbon sequestration policies for agriculture," Journal of Environmental Economics and Management, Elsevier, vol. 46(2), pages 231-250, September.
  3. Kenneth M. Chomitz & Franck Lecocq, 2003. "Temporary sequestration credits : an instrument for carbon bears," Policy Research Working Paper Series 3181, The World Bank.
  4. Feng, Hongli & Zhao, Jinhua & Kling, Catherine L., 2002. "Time Path and Implementation of Carbon Sequestration (The)," Staff General Research Papers 5068, Iowa State University, Department of Economics.
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Cited by:
  1. Mireille Chiroleu-Assouline & Sebastien Roussel, 2014. "Payments for Carbon Sequestration in Agricultural Soils: Incentives for the Future and Rewards for the Past," CEEES Paper Series CE3S-01/14, European University at St. Petersburg, Department of Economics.
  2. Nick Hanley & Simanti Banerjee & Gareth D. Lennox & Paul R. Armsworth, 2012. "How should we incentivize private landowners to ‘produce’ more biodiversity?," Oxford Review of Economic Policy, Oxford University Press, vol. 28(1), pages 93-113, Spring.

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