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Combining performance-based and action-based payments to provide environmental goods under uncertainty

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  • Derissen, Sandra
  • Quaas, Martin F.

Abstract

Payments for environmental services (PES) are widely adopted to support the conservation of biodiversity and other environmental goods. Challenges that PES schemes have to tackle are (i) environmental uncertainty and (ii) information asymmetry between the provider of the service (typically a farmer) and the regulator. Environmental uncertainty calls for action-based payment schemes, because of the more favorable risk allocation if the farmer is risk-averse. Information asymmetry, on the other hand, calls for a performance-based payment, because of the more direct incentives for the farmer. Based on a principal-agent model, we study the optimal combination of both, performance-based and action-based payments under conditions of environmental uncertainty and asymmetric information. We find that for a risk-neutral regulator a combination is optimal in the majority of cases and that the welfare gain of the combined scheme over a pure action-based (performance-based) payment increases with information asymmetry (environmental uncertainty). We further show that for a regulator who is risk-averse against fluctuations in environmental goods provision the optimal performance-based payment is lower than for a risk-neutral regulator. We quantitatively illustrate our findings in a case study on the enhancement of the butterfly Scarce Large Blue (Maculinea teleius) in Landau/Germany.

Suggested Citation

  • Derissen, Sandra & Quaas, Martin F., 2013. "Combining performance-based and action-based payments to provide environmental goods under uncertainty," Ecological Economics, Elsevier, vol. 85(C), pages 77-84.
  • Handle: RePEc:eee:ecolec:v:85:y:2013:i:c:p:77-84 DOI: 10.1016/j.ecolecon.2012.11.001
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    References listed on IDEAS

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    Cited by:

    1. Karlõševa, Aljona & Nõmmann, Sulev & Nõmmann, Tea & Urbel-Piirsalu, Evelin & Budziński, Wiktor & Czajkowski, Mikołaj & Hanley, Nick, 2016. "Marine trade-offs: Comparing the benefits of off-shore wind farms and marine protected areas," Energy Economics, Elsevier, pages 127-134.
    2. Smith, Helen F. & Sullivan, Caroline A., 2014. "Ecosystem services within agricultural landscapes—Farmers' perceptions," Ecological Economics, Elsevier, pages 72-80.
    3. Patrick Schulte & Heinz Welsch & Sascha Rexhäuser, 2016. "ICT and the Demand for Energy: Evidence from OECD Countries," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, pages 119-146.
    4. Ben White & Nick Hanley, 2014. "Should We Pay for Ecosystem Service Outputs, Actions or Both?," Discussion Papers in Environment and Development Economics 2014-08, University of St. Andrews, School of Geography and Sustainable Development.
    5. Dörschner, T. & Musshoff, O., 2015. "How do incentive-based environmental policies affect environment protection initiatives of farmers? An experimental economic analysis using the example of species richness," Ecological Economics, Elsevier, pages 90-103.
    6. Nora Vogt, 2015. "Environmental Risk Negatively Impacts Trust and Reciprocity in Conservation Contracts: Evidence from a Laboratory Experiment," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, pages 417-431.
    7. Drechsler, Martin, 2017. "Performance of Input- and Output-based Payments for the Conservation of Mobile Species," Ecological Economics, Elsevier, pages 49-56.
    8. Utkur Djanibekov & Asia Khamzina, 2016. "Stochastic Economic Assessment of Afforestation on Marginal Land in Irrigated Farming System," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, pages 95-117.
    9. Reutemann, Tim & Engel, Stefanie & Pareja, Eliana, 2016. "How (not) to pay — Field experimental evidence on the design of REDD+ payments," Ecological Economics, Elsevier, pages 220-229.

    More about this item

    Keywords

    Conservation contracts; Payments for ecosystem services; Payments for environmental services; Biodiversity; Uncertainty;

    JEL classification:

    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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