Green payment programs, asymmetric information and the role of fixed costs
AbstractMany conservation programs offer financial compensation to farmers in exchange for socially desired services, such as soil conservation or biodiversity protection. Realization of the conservation objective at minimum cost requires payments to just cover the extra costs incurred by each individual (type of) farmer. In the presence of information asymmetries regarding costs, incentive-compatible contracts can be designed to mitigate excess compensation, but these typically only provide partial improvement because of several distortions. We argue that these distortions are inevitable only if all conservation costs are variable in nature. If there are fixed costs too, we find that the least-cost solution can be incentive compatible. We identify the exact conditions under which these maximum savings can be obtained and conclude that, given the relevance of fixed costs in conservation services provision, incentive—compatible contracts deserve a second look.
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Bibliographic InfoPaper provided by European Association of Agricultural Economists in its series 2008 International Congress, August 26-29, 2008, Ghent, Belgium with number 44320.
Date of creation: 2008
Date of revision:
Asymmetric information; environmental benefits; mechanism design; Environmental Economics and Policy;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-11-25 (All new papers)
- NEP-CTA-2008-11-25 (Contract Theory & Applications)
- NEP-ENV-2008-11-25 (Environmental Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Luca Di Corato, 2006. "Mechanism Design for Biodiversity Conservation in Developing Countries," "Marco Fanno" Working Papers 0034, Dipartimento di Scienze Economiche "Marco Fanno".
- Ferraro, Paul J., 2008. "Asymmetric information and contract design for payments for environmental services," Ecological Economics, Elsevier, vol. 65(4), pages 810-821, May.
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- 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.
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