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Should We Pay for Ecosystem Service Outputs, Inputs or Both?

Author

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  • Ben White

    () (University of Western Australia)

  • Nick Hanley

    () (University of St Andrews)

Abstract

Abstract Payments for ecosystem service outputs have recently become a popular policy prescription for a range of agri-environmental schemes. The focus of this paper is on the choice of contract instruments to incentivise the provision of ecosystem service outputs from farms. The farmer is better informed than the regulator in terms of hidden information about costs and hidden-actions relating to effort. The results show that with perfect information, the regulator can contract equivalently on inputs or outputs. With hidden information, input-based contracts are more cost effective at reducing the informational rent related to adverse selection than output-based contracts. Mixed contracts are also cost-effective, especially where one input is not observable. Such contracts allow the regulator to target variables that are “costly-to-fake” as opposed to those prone to moral hazard such as effort. Further results are given for fixed price contracts and input-based contracts with moral hazard. The model is extended to include a discussion of repeated contracting and the scope that exists for the regulator to benefit from information revealed by the initial choice of contract. The models are applied to a case study of contracting with farmers to protect high biodiversity native vegetation that also provides socially-valuable ecosystem services.

Suggested Citation

  • Ben White & Nick Hanley, 2016. "Should We Pay for Ecosystem Service Outputs, Inputs or Both?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 63(4), pages 765-787, April.
  • Handle: RePEc:kap:enreec:v:63:y:2016:i:4:d:10.1007_s10640-016-0002-x
    DOI: 10.1007/s10640-016-0002-x
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    References listed on IDEAS

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    Cited by:

    1. Drechsler, Martin, 2017. "Performance of Input- and Output-based Payments for the Conservation of Mobile Species," Ecological Economics, Elsevier, vol. 134(C), pages 49-56.
    2. repec:gam:jsusta:v:9:y:2017:i:12:p:2210-:d:120980 is not listed on IDEAS

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