Heterogeneity in Farmers’ Social Preferences and the Design of Green Payment Schemes

We examine how social preferences affect the workings of voluntary green payment schemes and show that a regulator could use facilitation services along with a social reward to generate better ecological outcome at less cost by exploiting a farmer’s social preferences to gain a green social-image/reputation. To motivate our model, we first present the results of an incentivized elicitation survey in Scotland which shows that there is a social norm of biodiversity protection on private land among farmers. Moreover, the results of a discrete choice experiment reveal that farmers are willing to give up economic rents for more publicity of their conservation activities; this confirms the relevance of reputational gain in the context of green payment schemes. Our model assumes two types of farmers, green and brown, with a green farmer taking more biodiversity protection actions than a brown farmer. We design a menu of contracts that offers both monetary incentives and non-monetary incentives (a facilitation service with social reward) to induce both type of farmers to join the scheme and to exert first-best levels (i.e., symmetric information levels) of action. Results show that under asymmetric information the regulator can implement the symmetric information equilibrium levels of biodiversity protection actions with only non-monetary incentives for the green farmer and only monetary incentives for the brown farmer. This implies that a regulator can ensure better environmental outcomes, at a lower cost, by exploiting farmers’ social preferences and by offering non-monetary incentives.