Endogenous Social Norms, Mechanism Design, and Payment for Environmental Services

Herein, we examine the optimal contract design when social norms have a disutility on landowners' participation in payment for environmental services programs. We find that a regulator can use less powerful monetary incentives to induce landowners to retire more land when the regulator appeals to social norms. Next, we consider the case when landowners determine the social norms of land retirement endogenously given that they live in small communities. We find that when there is asymmetric information about personal norms, the high-personal-norm type will retire more than the optimal amount of land and the low-personal-norm type will retire less than the optimal amount of land. We also explore when there is asymmetric information about landowners' sensitivities to social norms. We find that the optimal contract design depends on the relative magnitude of landowners' personal norms and the expected social norms. The results differ from the standard mechanism design literature.