Optimal conservation programs, asymmetric information and the role of fixed costs

C. Arguedas, D.P. van Soest

Research output: Contribution to journalArticleScientificpeer-review

Abstract

An increasing number of environmental protection programs offers financial compensation to farmers in exchange for conservation services. Incentive-compatible contracts can be designed to mitigate excess compensation, but the extant literature suggests that outcomes are always second-best so that other instruments (such as conservation auctions) may be preferred. We argue that the claim regarding the first-best solution never being incentive-compatible is correct if all conservation costs are variable in nature; if there are fixed costs too, the first-best compensation scheme may be incentive-compatible after all. Given the relevance of fixed costs in conservation issues, we conclude that incentive-compatible contracts should be given a second chance as a policy measure to induce conservation.
Original languageEnglish
Pages (from-to)305-323
JournalEnvironmental and Resource Economics
Volume50
Issue number2
Publication statusPublished - 2011

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asymmetric information
Conservation
incentive
cost
Costs
Environmental protection
environmental protection
programme
Conservation programs
Asymmetric information
Fixed costs
Incentive compatible
Compensation and Redress

Cite this

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title = "Optimal conservation programs, asymmetric information and the role of fixed costs",
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Optimal conservation programs, asymmetric information and the role of fixed costs. / Arguedas, C.; van Soest, D.P.

In: Environmental and Resource Economics, Vol. 50, No. 2, 2011, p. 305-323.

Research output: Contribution to journalArticleScientificpeer-review

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AB - An increasing number of environmental protection programs offers financial compensation to farmers in exchange for conservation services. Incentive-compatible contracts can be designed to mitigate excess compensation, but the extant literature suggests that outcomes are always second-best so that other instruments (such as conservation auctions) may be preferred. We argue that the claim regarding the first-best solution never being incentive-compatible is correct if all conservation costs are variable in nature; if there are fixed costs too, the first-best compensation scheme may be incentive-compatible after all. Given the relevance of fixed costs in conservation issues, we conclude that incentive-compatible contracts should be given a second chance as a policy measure to induce conservation.

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