IDEAS home Printed from https://ideas.repec.org/p/ags/aaea22/322103.html
   My bibliography  Save this paper

Payments and Penalties in Ecosystem Services Programs

Author

Listed:
  • Kim, Youngho
  • Lichtenberg, Erik
  • Newburn, David

Abstract

Payment for ecosystem services (PES) program contracts include penalties for non-performance to ensure that these programs receive the environmental benefits they have been paying for. The standard penalty structure in PES programs requires participants to pay back all program payments received if the contract is terminated before the end of the contract lifetime. We derive the optimal non-completion penalty structure, which decouples the penalty from payments received. In contrast to the backward-looking standard penalty, the optimal penalty is forward-looking and equals the principal's net future environmental benefits lost due to contract non-completion. The optimal penalty thus falls over the life of the contract, in contrast to the standard penalty, which rises over the life of the contract. A numerical policy simulation with heterogeneous agents based on features in federal agricultural conservation programs in the United States suggests that the optimal penalty structure can increase realized net environmental benefits significantly. Our results suggest that performance of most kinds of PES programs can be enhanced by decoupling non-completion penalties from payments and by adjusting how penalties vary over contract lifetimes.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Kim, Youngho & Lichtenberg, Erik & Newburn, David, 2022. "Payments and Penalties in Ecosystem Services Programs," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322103, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea22:322103
    DOI: 10.22004/ag.econ.322103
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/322103/files/22573.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.322103?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jeff Savage & Marc Ribaudo, 2016. "Improving the Efficiency of Voluntary Water Quality Conservation Programs," Land Economics, University of Wisconsin Press, vol. 92(1), pages 148-166.
    2. Wu, JunJie & Zilberman, David & Babcock, Bruce A., 2001. "Environmental and Distributional Impacts of Conservation Targeting Strategies," Journal of Environmental Economics and Management, Elsevier, vol. 41(3), pages 333-350, May.
    3. Feng, Hongli & Kurkalova, Lyubov A. & Kling, Catherine L. & Gassman, Philip W., 2006. "Environmental conservation in agriculture: Land retirement vs. changing practices on working land," Journal of Environmental Economics and Management, Elsevier, vol. 52(2), pages 600-614, September.
    4. Sven Wunder & Jan Börner & Driss Ezzine-de-Blas & Sarah Feder & Stefano Pagiola, 2020. "Payments for Environmental Services: Past Performance and Pending Potentials," Annual Review of Resource Economics, Annual Reviews, vol. 12(1), pages 209-234, October.
    5. Parrott, Scott D. & McIntosh, Christopher S., 1996. "Nonconstant Price Expectations and Acreage Response: The Case of Cotton Production in Georgia," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 28(1), pages 203-210, July.
    6. Schatzki, Todd, 2003. "Options, uncertainty and sunk costs:: an empirical analysis of land use change," Journal of Environmental Economics and Management, Elsevier, vol. 46(1), pages 86-105, July.
    7. Paul J. Ferraro & R. David Simpson, 2002. "The Cost-Effectiveness of Conservation Payments," Land Economics, University of Wisconsin Press, vol. 78(3), pages 339-353.
    8. Jussi Lankoski & Erik Lichtenberg & Markku Ollikainen, 2010. "Agri-Environmental Program Compliance in a Heterogeneous Landscape," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 47(1), pages 1-22, September.
    9. Alix-Garcia, Jennifer & Wolff, Hendrik, 2014. "Payment for Ecosystem Services from Forests," IZA Discussion Papers 8179, Institute of Labor Economics (IZA).
    10. Roger Claassen & Eric N. Duquette & David J. Smith, 2018. "Additionality in U.S. Agricultural Conservation Programs," Land Economics, University of Wisconsin Press, vol. 94(1), pages 19-35.
    11. Bourgeon, Jean-Marc & Jayet, Pierre-Alain & Picard, Pierre, 1995. "An incentive approach to land set-aside programs," European Economic Review, Elsevier, vol. 39(8), pages 1487-1509, October.
    12. Sanderson, B.A. & Quilkey, John J. & Freebairn, John W., 1980. "Supply Response Of Australian Wheat Growers," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 24(2), pages 1-12, August.
    13. FONAFIFO & CONAFOR & Ministry of Environment, 2012. "Lessons Learned for REDD+ from PES and Conservation Incentive Programs," World Bank Publications - Reports 27164, The World Bank Group.
    14. Erik Lichtenberg, 2021. "Additionality in Payment for Ecosystem Services Programs: Agricultural Conservation Subsidies in Maryland," Land Economics, University of Wisconsin Press, vol. 97(2), pages 305-320.
    15. Bruce L. Gardner, 1976. "Futures Prices in Supply Analysis," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 58(1), pages 81-84.
    16. Jennifer Alix-Garcia & Hendrik Wolff, 2014. "Payment for Ecosystem Services from Forests," Annual Review of Resource Economics, Annual Reviews, vol. 6(1), pages 361-380, October.
    17. Mason, Charles F. & Plantinga, Andrew J., 2013. "The additionality problem with offsets: Optimal contracts for carbon sequestration in forests," Journal of Environmental Economics and Management, Elsevier, vol. 66(1), pages 1-14.
    18. Rob Fraser, 2013. "To Cheat or Not To Cheat: Moral Hazard and Agri-environmental Policy," Journal of Agricultural Economics, Wiley Blackwell, vol. 64(3), pages 527-536, September.
    19. Askari, Hossein & Cummings, John Thomas, 1977. "Estimating Agricultural Supply Response with the Nerlove Model: A Survey," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 257-292, June.
    20. Andrea Cattaneo, 2003. "The Pursuit of Efficiency and Its Unintended Consequences: Contract Withdrawals in the Environmental Quality Incentives Program," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 25(2), pages 449-469.
    21. Fleming, Patrick & Lichtenberg, Erik & Newburn, David A., 2018. "Evaluating impacts of agricultural cost sharing on water quality: Additionality, crowding In, and slippage," Journal of Environmental Economics and Management, Elsevier, vol. 92(C), pages 1-19.
    22. JunJie Wu, 2000. "Slippage Effects of the Conservation Reserve Program," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 979-992.
    23. Michael J. Roberts & Shawn Bucholtz, 2005. "Slippage in the Conservation Reserve Program or Spurious Correlation? A Comment," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(1), pages 244-250.
    24. Leah H. Palm-Forster & Scott M. Swinton & Frank Lupi & Robert S. Shupp, 2016. "Too Burdensome to Bid: Transaction Costs and Pay-for-Performance Conservation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 98(5), pages 1314-1333.
    25. McIntosh, Christopher S. & Shumway, C. Richard, 1994. "Evaluating alternative price expectation models for multiproduct supply analysis," Agricultural Economics, Blackwell, vol. 10(1), pages 1-11, January.
    26. Adam Ozanne & Tim Hogan, 2001. "Moral hazard, risk aversion and compliance monitoring in agri-environmental policy," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 28(3), pages 329-348, October.
    27. Hongli Feng & Catherine L. Kling & Lyubov A. Kurkalova & Silvia Secchi & Philip W. Gassman, 2005. "The Conservation Reserve Program in the Presence of a Working Land Alternative: Implications for Environmental Quality, Program Participation, and Income Transfer," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(5), pages 1231-1238.
    28. Wallander, Steven & Claassen, Roger & Hill, Alexandra & Fooks, Jacob, 2019. "Working Lands Conservation Contract Modifications: Patterns in Dropped Practices," Economic Research Report 291964, United States Department of Agriculture, Economic Research Service.
    29. Feng Song & Jinhua Zhao & Scott M. Swinton, 2011. "Switching to Perennial Energy Crops Under Uncertainty and Costly Reversibility," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 93(3), pages 764-779.
    30. Jeffrey M. Peterson & Craig M. Smith & John C. Leatherman & Nathan P. Hendricks & John A. Fox, 2015. "Transaction Costs in Payment for Environmental Service Contracts," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 97(1), pages 219-238.
    31. Babcock, Bruce A. & Lakshminarayan, P. G. & Wu, J. & Zilberman, David, 1997. "Targeting Tools for the Purchase of Environmental Amenities," Staff General Research Papers Archive 5220, Iowa State University, Department of Economics.
    32. Rob Fraser, 2002. "Moral Hazard and Risk Management in Agri‐environmental Policy," Journal of Agricultural Economics, Wiley Blackwell, vol. 53(3), pages 475-487, November.
    33. Mariano Mezzatesta & David A. Newburn & Richard T. Woodward, 2013. "Additionality and the Adoption of Farm Conservation Practices," Land Economics, University of Wisconsin Press, vol. 89(4), pages 722-742.
    34. Talberth, John & Selman, Mindy & Walker, Sara & Gray, Erin, 2015. "Pay for Performance: Optimizing public investments in agricultural best management practices in the Chesapeake Bay Watershed," Ecological Economics, Elsevier, vol. 118(C), pages 252-261.
    35. Nicholas J Pates & Nathan P Hendricks, 2020. "Additionality from Payments for Environmental Services with Technology Diffusion," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(1), pages 281-299, January.
    36. Hellerstein, Daniel & Higgins, Nathaniel & Roberts, Michael, 2015. "Options for Improving Conservation Programs: Insights From Auction Theory and Economic Experiments," Amber Waves:The Economics of Food, Farming, Natural Resources, and Rural America, United States Department of Agriculture, Economic Research Service, issue 01, pages 1-1, February.
    37. Ferraro, Paul J., 2008. "Asymmetric information and contract design for payments for environmental services," Ecological Economics, Elsevier, vol. 65(4), pages 810-821, May.
    38. Ruiqing Miao & David A. Hennessy & Hongli Feng, 2014. "Sodbusting, Crop Insurance, and Sunk Conversion Costs," Land Economics, University of Wisconsin Press, vol. 90(4), pages 601-622.
    39. Jordan F. Suter & Gregory L. Poe & Nelson L. Bills, 2008. "Do Landowners Respond to Land Retirement Incentives? Evidence from the Conservation Reserve Enhancement Program," Land Economics, University of Wisconsin Press, vol. 84(1), pages 17-30.
    40. Horowitz, John K. & Just, Richard E., 2013. "Economics of additionality for environmental services from agriculture," Journal of Environmental Economics and Management, Elsevier, vol. 66(1), pages 105-122.
    41. Santiago Guerrero, 2021. "Characterising agri-environmental policies: Towards measuring their progress," OECD Food, Agriculture and Fisheries Papers 155, OECD Publishing.
    42. Hellerstein, Daniel M., 2017. "The US Conservation Reserve Program: The evolution of an enrollment mechanism," Land Use Policy, Elsevier, vol. 63(C), pages 601-610.
    43. Claassen, Roger & Cattaneo, Andrea & Johansson, Robert, 2008. "Cost-effective design of agri-environmental payment programs: U.S. experience in theory and practice," Ecological Economics, Elsevier, vol. 65(4), pages 737-752, May.
    44. Patrick M. Fleming & Erik Lichtenberg & David A. Newburn, 2020. "Water Quality Trading in the Presence of Conservation Subsidies," Land Economics, University of Wisconsin Press, vol. 96(4), pages 552-572.
    45. JunJie Wu & Bruce A. Babcock, 1996. "Contract Design for the Purchase of Environmental Goods from Agriculture," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(4), pages 935-945.
    46. Patrick Fleming, 2017. "Agricultural Cost Sharing and Water Quality in the Chesapeake Bay: Estimating Indirect Effects of Environmental Payments," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 99(5), pages 1208-1227.
    47. Kathy Baylis & Jonathan Coppess & Benjamin M. Gramig & Paavani Sachdeva, 2022. "Agri-environmental Programs in the United States and Canada," Review of Environmental Economics and Policy, University of Chicago Press, vol. 16(1), pages 83-104.
    48. Alexander Pfaff & Juan Robalino, 2017. "Spillovers from Conservation Programs," Annual Review of Resource Economics, Annual Reviews, vol. 9(1), pages 299-315, October.
    49. Rob Hart, 2005. "Combating moral hazard in agri-environmental schemes: a multiple-agent approach," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 32(1), pages 75-91, March.
    50. Alexander Pfaff & Juan Robalino, 2017. "Spillovers from Conservation Programs," Annual Review of Economics, Annual Reviews, vol. 9(1), pages 299-315, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:ags:aaea22:335794 is not listed on IDEAS

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Youngho Kim, 2024. "Payments for Ecosystem Services Programs and Climate Change Adaptation in Agriculture," Economics Series Working Papers 1054, University of Oxford, Department of Economics.
    2. repec:ags:aaea22:335971 is not listed on IDEAS
    3. Fleming, Patrick & Lichtenberg, Erik & Newburn, David, "undated". "Water Quality Trading Program Design with Heterogeneous Behavioral Responses," 2018 Annual Meeting, August 5-7, Washington, D.C. 274429, Agricultural and Applied Economics Association.
    4. Jean-Sauveur Ay, 2015. "Information sur l’hétérogénéité de la terre et délégation de la régulation foncière," Revue d'économie politique, Dalloz, vol. 125(3), pages 453-474.
    5. Yano, Yuki & Blandford, David, "undated". "Use of Penalties and Rewards in Agri-Environmental Policy," 82nd Annual Conference, March 31 - April 2, 2008, Royal Agricultural College, Cirencester, UK 36873, Agricultural Economics Society.
    6. Claassen, Roger & Cattaneo, Andrea & Johansson, Robert, 2008. "Cost-effective design of agri-environmental payment programs: U.S. experience in theory and practice," Ecological Economics, Elsevier, vol. 65(4), pages 737-752, May.
    7. Pathak, Santosh & Wang, Hua & Adusumilli, Naveen C., 2022. "Contract Non-compliance and Moral Hazard: Evidence from Cost-share Programs in Louisiana, USA," 2024 Annual Meeting, July 28-30, New Orleans, LA 322324, Agricultural and Applied Economics Association.
    8. Alix-Garcia, Jennifer & Wolff, Hendrik, 2014. "Payment for Ecosystem Services from Forests," IZA Discussion Papers 8179, Institute of Labor Economics (IZA).
    9. Yuki Yano & David Blandford, 2009. "Use of Compliance Rewards in Agri‐environmental Schemes," Journal of Agricultural Economics, Wiley Blackwell, vol. 60(3), pages 530-545, September.
    10. Cho, Wonjoo & Blandford, David, 2015. "Bilateral information asymmetry and irreversible practice adoption through agri-environmental policy: an application to peat land retirement in Norway," 89th Annual Conference, April 13-15, 2015, Warwick University, Coventry, UK 204212, Agricultural Economics Society.
    11. Lichtenberg, Erik, "undated". "Additionality of Conservation Cost Sharing," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 259939, Agricultural and Applied Economics Association.
    12. Ferraro, Paul J., 2008. "Asymmetric information and contract design for payments for environmental services," Ecological Economics, Elsevier, vol. 65(4), pages 810-821, May.
    13. Delacote, Philippe & Robinson, Elizabeth J.Z. & Roussel, Sébastien, 2016. "Deforestation, leakage and avoided deforestation policies: A spatial analysis," Resource and Energy Economics, Elsevier, vol. 45(C), pages 192-210.
    14. Jennifer M. Alix-Garcia & Elizabeth N. Shapiro & Katharine R. E. Sims, 2012. "Forest Conservation and Slippage: Evidence from Mexico’s National Payments for Ecosystem Services Program," Land Economics, University of Wisconsin Press, vol. 88(4), pages 613-638.
    15. Nicholas J Pates & Nathan P Hendricks, 2020. "Additionality from Payments for Environmental Services with Technology Diffusion," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(1), pages 281-299, January.
    16. repec:ags:aaea22:335794 is not listed on IDEAS
    17. Whitten, Stuart M., 2017. "Designing and implementing conservation tender metrics: Twelve core considerations," Land Use Policy, Elsevier, vol. 63(C), pages 561-571.
    18. Nicole Karwowski, 2022. "Estimating the Effect of Easements on Agricultural Production," NBER Chapters, in: American Agriculture, Water Resources, and Climate Change, pages 53-105, National Bureau of Economic Research, Inc.
    19. He, Fei & Lee, Dogil & Borisova, Tatiana & Graham, Wendy & Athearn, Kevin & Dukes, Michael & Merrick, Jason & Hochmuth, Robert, 2024. "Farm-scale economic and environmental tradeoffs of land use and land management decisions," Agricultural Water Management, Elsevier, vol. 301(C).
    20. Lichtenberg, Erik & Wang, Haoluan & Newburn, David, "undated". "Uptake and Additionality in a Green Payment Program: A Panel Data Study of the Maryland Cover Crop Program," 2018 Annual Meeting, August 5-7, Washington, D.C. 274455, Agricultural and Applied Economics Association.
    21. Marc N. Conte & Robert Griffin, 2019. "Private Benefits of Conservation and Procurement Auction Performance," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(3), pages 759-790, July.
    22. Sawadgo, Wendiam & Plastina, Alejandro, 2021. "Do cost-share programs increase cover crop use? Empirical evidence from Iowa," ISU General Staff Papers 202101010800001084, Iowa State University, Department of Economics.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q57 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Ecological Economics
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:aaea22:322103. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: https://edirc.repec.org/data/aaeaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.