Coping with risk and distortion in performance-based payment for environmental services schemes

Around the world, ecosystems are in decline and as human population increases new policy mechanisms to counteract this trend are increasingly being sought-after. A growing group of policy makers and practitioners are gaining interest in the new conservation performance payment approach. This policy approach falls within the larger group of payments for environmental services. This paper applies findings from a model developed by Baker (2002) on distortion and risk in performance-based employment contracts to conservation performance payments. Guidelines for the optimal design of pro-conservation incentives are identified. The theoretical considerations are backed-up by reviews of case studies on existing performance payments for water quality management and biodiversity conservation.