PAYMENTS FOR ECOSYSTEM SERVICES SCHEMES FOR SPATIALLY COORDINATED LAND MANAGEMENT: AN EXPERIMENTAL STUDY

Open Access
Author:
Banerjee, Simanti
Graduate Program:
Agricultural Economics
Degree:
Doctor of Philosophy
Document Type:
Dissertation
Date of Defense:
September 22, 2010
Committee Members:
  • James Samuel Shortle, Dissertation Advisor
  • James Samuel Shortle, Committee Chair
  • Anthony Mark Kwasnica, Committee Chair
  • Edward C Jaenicke, Committee Member
  • Robert P Brooks, Committee Member
Keywords:
  • Spatial
  • Ecosystem Services
  • Experimental Economics
Abstract:
Tackling the problem of ecosystem loss and ecosystem services (ES) degradation on private working landscapes is an important environmental policy challenge. Numerous policy measures have been implemented on these private properties to arrest this degradation. These policies include both economic and non-economic instruments which instruct landowners to change their land uses such that it is beneficial for the protection of ES. The subject matter of this dissertation deals with economic instruments for ES conservation. The key feature of these instruments is that they pay landowners for adopting prescribed pro-conservation land uses on their properties. The Conservation Reserve Program (CRP) is an example of one such economic conservation policy implemented by the USDA. Of these economic payment schemes, of particular interest are those which include market based instruments such as uniform rate payment schemes and auction based schemes. The term Payment for Ecosystem Services (PES) schemes is commonly used for these schemes. PES schemes can be employed to attain different conservation goals. This dissertation is focused on the study of PES schemes that incentivize landowners to produce spatial patters of conservation land uses on their properties. This objective is not trivial as often degraded habitats exist across multiple property boundaries. Creation of these patterns will require the cooperation of neighboring property owners. The Agglomeration Bonus (AB) subsidy scheme has been proposed in the economic literature on PES schemes to achieve this spatial objective. It is a simple two-component payment scheme that can incentivize spatially coordinated land management by neighboring landowners and hence is ecologically effective. The ecological effectiveness of the scheme suffers in agricultural landscapes where participants are not certain about their neighbors' conservation attitudes and hence their commitment to participate in the conservation programs. These uncertainties discourage spatially coordinated participation. The first essay in this dissertation initiates an experimental examination of spatial coordination under the AB scheme in a new network setting in the presence of these participation doubts. The experimental methodology provides the means to test the performance of the scheme in big and small networks. For the experiments the AB is structured as a spatial coordination game with subjects arranged around a circular grid whose size varies across experimental sessions. On this grid every subject can coordinate with the same number of neighbors whose identity is different for different individuals. This type of strategic environment is novel to the study of the AB and provides insights that are useful for policy implementation. In line with past experimental predictions spatially coordinated land management is found to be tougher in bigger groups than in smaller ones. This is the key result of the study. When participation in the conservation scheme is characterized by doubts about conservation attitudes, then instances of coordination failure will be much higher within a large group of landowners than a smaller group even if the number of neighbors of the landowners is the same. The second finding from the experiments is that while spatial coordination is tougher in bigger groups, localized spatial patterns appear on the circular landscape indicating partial policy success. The second essay in this research presents the structure of a reverse auction for the procurement of spatially coordinated pro-conservation land uses from neighboring landowners. The study of auctions is especially important to the economic performance of PES schemes as these schemes are limited by a fixed budget from which landowner payments have to be made. Thus environmental benefits from spatially coordinated land uses should be procured at the lowest possible cost. Auctions are a popular mechanism to address this cost efficiency objective especially because the conservation agency does not have information about landowners’ costs. The second essay presents the structure of a simple iterative descending price auction with full information feedback about results that is designed to select bids from spatially adjacent landowners. The auction structure employs a benefit-cost ratio scoring metric like the CRP to evaluate different combinations of bids to make a final selection. Lab experiments are conducted to test the performance of the auction in settings which vary on the basis of the information available to subjects as well as the cost-benefit parameters associated with the projects for which bids are submitted in the auction. The experimental data provides insights about the ecological effectiveness and economic efficiency of the iterative auction. The chief result of the study is that the ecological effectiveness in the presence of information about the spatial goal is not significantly different from when this information is not present. However cost efficiency of the mechanism is significantly different. Thus when subjects know that their bids relative to their neighbors’ bids influence their chances of winning, they submit higher bids. This implies that in the presence of information, procurement of the same amount of environmental benefits is costlier. Since the PES budgets are limited, increase in the costs of conservation indicates a reduction in cost efficiency of the mechanism. The study also provides an analysis of bidding behavior of subjects in the final iteration of the auction. This analysis is relevant to the study of rent seeking in conservation auctions as well as to highlight the difference in bidding behavior of the winners and losers in the auction. Overall the objective of this dissertation is to address both economic efficiency and ecological effectiveness of PES schemes when spatial patterns of land uses are important for ES conservation. The results of this study have consequence for the performance of PES schemes on real landscapes with landowners who have various economic characteristics. It also presents the need for more research on both auctions and subsidies for spatially coordinated land management.