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

  • Derissen, Sandra
  • Quaas, Martin F.

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.

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Article provided by Elsevier in its journal Ecological Economics.

Volume (Year): 85 (2013)
Issue (Month): C ()
Pages: 77-84

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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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  1. 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.
  2. Bulte, Erwin H. & Lipper, Leslie & Stringer, Randy & Zilberman, David, 2008. "Payments for ecosystem services and poverty reduction: concepts, issues, and empirical perspectives," Environment and Development Economics, Cambridge University Press, vol. 13(03), pages 245-254, June.
  3. Zabel, Astrid & Roe, Brian, 2009. "Optimal design of pro-conservation incentives," Ecological Economics, Elsevier, vol. 69(1), pages 126-134, November.
  4. Peter Bardsley & Ingrid Burfurd, 2008. "Contract Design for Biodiversity Procurement," Department of Economics - Working Papers Series 1031, The University of Melbourne.
  5. Vatn, Arild, 2009. "An institutional analysis of methods for environmental appraisal," Ecological Economics, Elsevier, vol. 68(8-9), pages 2207-2215, June.
  6. Steffen Andersen & Glenn W. Harrison & Morten I. Lau & E. Elisabet Rutström, 2008. "Eliciting Risk and Time Preferences," Econometrica, Econometric Society, vol. 76(3), pages 583-618, 05.
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