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Efficient Procurement of Ecosystem Services – Adverse versus Beneficial Selection

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  • Russell, Noel P.
  • Sauer, Johannes
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    Abstract

    The role of adverse selection in schemes for the procurement of ecosystem services has been investigated by many who suggest that efficiency of these schemes is impaired by problems arising from adverse selection. However recent research on the UK Environmental Stewardship Scheme suggests that these types of procurement system may not be characterised by adverse selection but by what might be more appropriately labelled as “beneficial selection”. These results are based on the analysis of a simple theoretical model and the empirical implications are confirmed using econometric analysis. However it is also suggested that, even with beneficial selection, there will still remain systemic inefficiency arising from a continuing need for the payment of informational rents to the farmers participating in the scheme. This paper presents the analysis of a model that focuses on the Principal- Agent characteristics of this problem and sets out to investigate the tradeoffs that arise in designing ecosystem procurement mechanisms where payment of informational rents to participants can be used to increase overall efficiency. The impact of beneficial selection is carefully explored here, and we suggest implications for policy makers and empirical propositions to be tested using a suitable data set.

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    Bibliographic Info

    Paper provided by Agricultural Economics Society in its series 86th Annual Conference, April 16-18, 2012, Warwick University, Coventry, UK with number 134988.

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    Date of creation: Apr 2012
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    Handle: RePEc:ags:aesc12:134988

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    Related research

    Keywords: Asymmetric Information; Beneficial Selection; Adverse Selection; Payment for Ecosystem Services; Environmental Economics and Policy; D82; Q57;

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    1. Frank Wätzold & Martin Drechsler, 2005. "Spatially Uniform versus Spatially Heterogeneous Compensation Payments for Biodiversity-Enhancing Land-Use Measures," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 31(1), pages 73-93, 05.
    2. Hanming Fang & Michael P. Keane & Dan Silverman, 2008. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 303-350, 04.
    3. Andrew Moxey & Ben White & Adam Ozanne, 1999. "Efficient Contract Design for Agri-Environment Policy," Journal of Agricultural Economics, Wiley Blackwell, vol. 50(2), pages 187-202.
    4. JunJie Wu & Bruce A. Babcock, 1996. "Contract Design for the Purchase of Environmental Goods from Agriculture," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(4), pages 935-945.
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    6. Emmanuelle Quillérou & Rob Fraser, 2010. "Adverse Selection in the Environmental Stewardship Scheme: Does the Higher Level Stewardship Scheme Design Reduce Adverse Selection?," Journal of Agricultural Economics, Wiley Blackwell, vol. 61(2), pages 369-380.
    7. Ferraro, Paul J., 2008. "Asymmetric information and contract design for payments for environmental services," Ecological Economics, Elsevier, vol. 65(4), pages 810-821, May.
    8. Mathias Dewatripont & Patrick Bolton, 2005. "Contract theory," ULB Institutional Repository 2013/9543, ULB -- Universite Libre de Bruxelles.
    9. Madhu Khanna & Amy Ando, 2009. "Science, economics and the design of agricultural conservation programmes in the US," Journal of Environmental Planning and Management, Taylor & Francis Journals, vol. 52(5), pages 575-592.
    10. Uwe Latacz-Lohmann & Carel Van der Hamsvoort, 1997. "Auctioning Conservation Contracts: A Theoretical Analysis and an Application," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 407-418.
    11. Claassen, Roger & Cattaneo, Andrea & Johansson, Robert, 2008. "Cost-effective design of agri-environmental payment programs: U.S. experience in theory and practice," Ecological Economics, Elsevier, vol. 65(4), pages 737-752, May.
    12. Canton, Joan & De Cara, Stéphane & Jayet, Pierre-Alain, 2009. "Agri-environmental schemes: Adverse selection, information structure and delegation," Ecological Economics, Elsevier, vol. 68(7), pages 2114-2121, May.
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