Asymmetric information and contract design for payments for environmental services


P.J. Ferraro

Type of Document:
Conference Proceeding or Document


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Abstract: In contractual relationships involving payments for environmental services, conservation buyers know less than landowners know about the costs of contractual compliance. Such asymmetric information reduces the effectiveness of payment schemes and increases the expense to implement them. To reduce these negative effects, conservation agents can take three approaches: (1) acquire information on observable landowner attributes that are correlated with compliance costs; (2) offer landowners a menu of screening contracts; and (3) allocate contracts through procurement auctions. Although current theory and empirical work provides practitioners with some insights into the relative merits of each approach, more theoretical work and experimentation in the field is necessary before definitive conclusions can be drawn.


1. Introduction 2. Hidden Information 3. Gathering Information from Costly-to-Fake Signals 4. Screening Contracts 5. Procurement Auctions for PES Contracts a. What are they? b. Conservation Auctions in Practice c. Pricing Rules d. Targeted Auctions when Contracts Vary in Quality e. Repeated Contracting f. Other Issues in PES Auction Design 6. PES Contracting in Low and Middle-Income Nations 7. Conclusion

Additional Bibliographic Information

Presented at the ZEF-CIFOR workshop: Payments for Environmental Services (PES): Methods and Design in Developing and Developed Countries, Titisee, Germany, 15-18 June 2005

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