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Should We Pay for Ecosystem Service Outputs, Inputs or Both?

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  • Ben White

    (University of Western Australia)

  • Nick Hanley

    (University of St Andrews)

Abstract

Payments for ecosystem service outputs have recently become a popular policy prescription for a range of agri-environmental schemes. The focus of this paper is on the choice of contract instruments to incentivise the provision of ecosystem service outputs from farms. The farmer is better informed than the regulator in terms of hidden information about costs and hidden-actions relating to effort. The results show that with perfect information, the regulator can contract equivalently on inputs or outputs. With hidden information, input-based contracts are more cost effective at reducing the informational rent related to adverse selection than output-based contracts. Mixed contracts are also cost-effective, especially where one input is not observable. Such contracts allow the regulator to target variables that are “costly-to-fake” as opposed to those prone to moral hazard such as effort. Further results are given for fixed price contracts and input-based contracts with moral hazard. The model is extended to include a discussion of repeated contracting and the scope that exists for the regulator to benefit from information revealed by the initial choice of contract. The models are applied to a case study of contracting with farmers to protect high biodiversity native vegetation that also provides socially-valuable ecosystem services.

Suggested Citation

  • Ben White & Nick Hanley, 2016. "Should We Pay for Ecosystem Service Outputs, Inputs or Both?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 63(4), pages 765-787, April.
    • Handle: RePEc:kap:enreec:v:63:y:2016:i:4:d:10.1007_s10640-016-0002-x
    DOI: 10.1007/s10640-016-0002-x
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    Cited by:

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    2. Vergamini, Daniele & Viaggi, Davide & Raggi, Meri, 2020. "Evaluating the Potential Contribution of Multi-Attribute Auctions to Achieve Agri-Environmental Targets and Efficient Payment Design," Ecological Economics, Elsevier, vol. 176(C).
    3. Simpson, Katherine & Armsworth, Paul R. & Dallimer, Martin & Nthambi, Mary & de Vries, Frans P. & Hanley, Nick, 2023. "Improving the ecological and economic performance of agri-environment schemes: Payment by modelled results versus payment for actions," Land Use Policy, Elsevier, vol. 130(C).
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    5. Canessa, Carolin & Venus, Terese & Wiesmeier, Miriam & Mennig, Philipp & Sauer, Johannes, 2023. "Farmers’ preferences over alternative AECS designs. Do the ecological conditions influence the willingness to accept result-based contracts?," 97th Annual Conference, March 27-29, 2023, Warwick University, Coventry, UK 334508, Agricultural Economics Society - AES.
    6. Šumrada, Tanja & Vreš, Branko & Čelik, Tatjana & Šilc, Urban & Rac, Ilona & Udovč, Andrej & Erjavec, Emil, 2021. "Are result-based schemes a superior approach to the conservation of High Nature Value grasslands? Evidence from Slovenia," Land Use Policy, Elsevier, vol. 111(C).
    7. Bartosz Bartkowski, 2021. "Don't throw efficiency out with the bathwater: A reply to Jeffery and Verheijen (2020)," Papers 2104.06229, arXiv.org, revised Apr 2021.
    8. Letort, Elodie & Dupraz, P, 2023. "Animal feed as a lever to reduce methane emissions: a micro-econometric approach applied to French dairy farms," Working Papers 338908, Institut National de la recherche Agronomique (INRA), Departement Sciences Sociales, Agriculture et Alimentation, Espace et Environnement (SAE2).
    9. Marcel Franke & Bernhard K. J. Neumärker, 2022. "A Climate Alliance through Transfer: Transfer Design in an Economic Conflict Model," World, MDPI, vol. 3(1), pages 1-14, February.
    10. Drechsler, Martin, 2017. "Performance of Input- and Output-based Payments for the Conservation of Mobile Species," Ecological Economics, Elsevier, vol. 134(C), pages 49-56.
    11. Matteo Olivieri & Maria Andreoli & Daniele Vergamini & Fabio Bartolini, 2021. "Innovative Contract Solutions for the Provision of Agri-Environmental Climatic Public Goods: A Literature Review," Sustainability, MDPI, vol. 13(12), pages 1-22, June.
    12. Bartkowski, Bartosz & Droste, Nils & Ließ, Mareike & Sidemo-Holm, William & Weller, Ulrich & Brady, Mark V., 2021. "Payments by modelled results: A novel design for agri-environmental schemes," Land Use Policy, Elsevier, vol. 102(C).
    13. Thiago Morello, 2023. "An Agri-environmental Scheme for Reducing Inputs Subjected to Accidental Spillage: An Application to Agricultural Burnings by Smallholders," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 84(2), pages 383-408, February.
    14. Katsuya Tanaka & Nicholas Hanley & Laure Kuhfuss, 2022. "Farmers’ preferences toward an outcome‐based payment for ecosystem service scheme in Japan," Journal of Agricultural Economics, Wiley Blackwell, vol. 73(3), pages 720-738, September.
    15. Zabel, Astrid, 2019. "Biodiversity-based payments on Swiss alpine pastures," Land Use Policy, Elsevier, vol. 81(C), pages 153-159.
    16. Alban Lika & Francesco Galioto & Davide Viaggi, 2017. "Water Authorities’ Pricing Strategies to Recover Supply Costs in the Absence of Water Metering for Irrigated Agriculture," Sustainability, MDPI, vol. 9(12), pages 1-16, November.
    17. David Wuepper & Robert Huber, 2022. "Comparing effectiveness and return on investment of action‐ and results‐based agri‐environmental payments in Switzerland," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(5), pages 1585-1604, October.

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