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Contractual Difficulties in Environmental Management and the Protection of Biodiversity: The Case of Conservation and Mitigation Banking

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  • Paul Hallwood

    (University of Connecticut)

Abstract

This paper offers a principal-agent model of feasible private contracting in mitigation and conservation banking aimed at the protection of natural habitat and bio-diversity of US wetlands and uplands. It is shown that while it is straightforward to design an incentive contract, such a contract may not achieve the federally mandated objective of no net loss of habitat. This is because the minimum payment required as an economic incentive to private agents may be greater than what they should receive for the habitat values that they actually created in the field. This possible problem is shown to derive from nonconvexity in the production possibility set between the biological value of land as natural habitat and in non-habitat uses such as in urban development. The paper concludes with a consideration of several institutional devises that may promote the convergence of private contracting and the attainment of no net loss. These include the payment of subsidies, greater accuracy in the identification of actual quality by the principal, and the use of several incentive alignment devises.

Suggested Citation

  • Paul Hallwood, 2003. "Contractual Difficulties in Environmental Management and the Protection of Biodiversity: The Case of Conservation and Mitigation Banking," Working papers 2003-19, University of Connecticut, Department of Economics.
  • Handle: RePEc:uct:uconnp:2003-19
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    File URL: http://web2.uconn.edu/economics/working/2003-19.pdf
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    References listed on IDEAS

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    1. Helfand Gloria E. & Rubin Jonathan, 1994. "Spreading versus Concentrating Damages: Environmental Policy in the Presence of Nonconvexities," Journal of Environmental Economics and Management, Elsevier, vol. 27(1), pages 84-91, July.
    2. Baumol, William J & Bradford, David F, 1972. "Detrimental Externalities and Non-Convexity of the Production Set," Economica, London School of Economics and Political Science, vol. 39(154), pages 160-176, May.
    3. Linda Fernandez & Larry Karp, 1998. "Restoring Wetlands Through Wetlands Mitigation Banks," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, pages 323-344.
    Full references (including those not matched with items on IDEAS)

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    Keywords

    biodiversity; conservation banks; environmental management; incentive contracts; mitigation banks; sustainable development.;

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