NO : WP-2018-006
AUTHOR : Rupayan Pal, Ada Wossink, and Prasenjit Banerjee
TITLE : SOCIAL REWARDS AND THE DESIGN OF VOLUNTARY INCENTIVE MECHANISM FOR BIODIVERSITY PROTECTION
We examine how endogenous social preferences could affect economic incentive design to encourage biodiversity protection on private land. A ‘green’ farmer may enjoy esteem from leading by example if there are few farmers who do the right thing. In contrast a farmer without social preferences (‘brown’ farmer) might merely tick the boxes and is expected to shirk from the desired environmental actions whenever possible unless this affects their reputation. We analyze the design of an incentive scheme that takes into account both types of farmers (‘green’ or ‘brown’) under asymmetric information about their true motivation. It follows that under perfect Bayesian equilibrium, the regulator can separate out the farmer types in a two-period setting by monitoring their voluntary conservation actions in response to payment in the first period. The optimal mechanism would be a mixture of a facilitation contract with small monetary incentive but high visibility to keep ‘green’ farmers interested and a higher monetary-incentive contract to attract the brown farmers.
Keywords : Mechanism Design, Social Norm, Esteem, Motivation Crowding, Signalling, Public goods, Agriculture.
JEL Code : D03 (Behavioural micro-economics – underlying principles); Q57 (Environmental Economics – ecosystem services); Q58 (Environmental Economics – governmental policy); D82 (Asymmetric and Private Information – Mechanism Design).