Evaluating the potentials of a marketable permits system in the field: An application to forest conservation in Shaktikhore, Nepal

A new paradigm in natural resource management has moved towards more decentralized mechanisms to reverse the degradation. One of such mechanisms is a marketable permits system (MPS). Although the properties of MPS have been studied and identified to be effective in controlled laboratory experiments, little is known about how MPS works in the real field setup. To fill the gap, this paper seeks to evaluate the effectiveness and potentials of MPS in the real forest conservation by implementing a framed field experiment. Shaktikhore, Nepal has been chosen for the experimental site, since farmers' livelihood there depends on forests and they are able to report their valuation of forestry from economic and environmental points of view. This experiment elicits economic valuation of local farmers for each unit of forestland, derives aggregate demand and supply of the permits, and with a uniform price auction (UPA), MPS field experiments were carried out to see equilibrium prices and efficiencies of the market. The results suggest that MPS is effective with high efficiency of 80% in the real field. For this success, UPA institution is identified to be the key element because (i) farmers with elementary education could understand and follow the rules of trading and (ii) they are induced to reveal their valuations of forestland through bids to buy and offers to sell. To our knowledge, this study is the first that designs and employs UPA institution under trader settings, showing the successful performance of such a MPS scheme in the real field of developing nations. Overall, our research suggests that MPS could be the effective policy option for "real" practice of natural resources management even with less administrative expertise, limited education and fewer resources to implement.