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Optimal Afforestation Contracts with Asymmetric information on Private Environmental Benefits

Author

Listed:
  • Signe Anthon

    (Royal Agricultural and Veterinarian University)

  • Bo Jellesmark Thorsen

    (Danish Forest and Landscape Research Institute)

Abstract

We investigate the problem of subsidising afforestation when private information exists with respect to the level of private utility derived from the project. We develop a simple model that allows for an intelligent design of contracts when information is asymmetric. The model involves the Principal and two groups of agents (landowners): a ‘green’ group deriving high private utility from the projects and a ‘conventional’ group deriving lower utility. Afforestation projects may be produced in different environmental quality, and we distinguish between two cases, a high quality and a low quality project. We find that the optimal set of contracts under asymmetric information involves two different contracts. One in which green landowners are somewhat overcompensated for projects of high quality, and one where conventional landowners are offered contracts including lower quality projects, compared to the symmetric case, but with compensation equal to his indifference payment. It is the ability to reduce quality requirements along with subsidies offered that allows for revelation of the private information. Finally, we discus how the results obtained may be used in the implementation of incentive schemes.

Suggested Citation

  • Signe Anthon & Bo Jellesmark Thorsen, 2004. "Optimal Afforestation Contracts with Asymmetric information on Private Environmental Benefits," Working Papers 2004.46, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2004.46
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    Cited by:

    1. Vedel, Suzanne Elizabeth & Thorsen, Bo Jellesmark & Jacobsen, Jette Bredahl, 2009. "First-movers, non-movers, and social gains from subsidising entry in markets for nature-based recreational goods," Ecological Economics, Elsevier, vol. 68(8-9), pages 2363-2371, June.
    2. Ellen Moons & Sandra Rousseau, 2005. "Policy design and the optimal location of forests in Flanders," Energy, Transport and Environment Working Papers Series ete0505, KU Leuven, Department of Economics - Research Group Energy, Transport and Environment.
    3. Vedel, Suzanne Elizabeth & Jacobsen, Jette Bredahl & Jellesmark Thorsen, Bo, 6. "First Movers, Non Movers and Social Gains from Supporting Entry in Markets for Nature-Based Recreational Goods," Scandinavian Forest Economics: Proceedings of the Biennial Meeting of the Scandinavian Society of Forest Economics, Scandinavian Society of Forest Economics, issue 42, April.

    More about this item

    Keywords

    Principal-agent theory; Incentive schemes; Revelation principle; Environmental economics;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q23 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Forestry

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