Optimal Conservation Programs, Asymmetric Information and the Role of Fixed Costs |
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Authors: | Carmen Arguedas and Daan P van Soest |
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Institution: | (1) Center of Economic Studies, K.U. Leuven, Naamsestraat 69, 3000 Leuven, Belgium |
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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. |
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Keywords: | |
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