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The Future of Payments for Environmental Services

December 1, 2011

In high-income nations, the concept of PES has gained traction largely because it complements ongoing efforts to redirect agricultural subsidies toward public goods through conservation payment schemes. In low- and middle-income nations, PES has become popular for 4 reasons (Pattanayak et al. 2010). First, weak institutions render regulations, indirect development strategies, and incentive-based quantity strategies (e.g., tradable development rights) difficult. Second, governments prefer subsidies to achieve policy objectives and are increasingly receptive to applying conditionality and performance metrics in the distribution of aid and subsidies. Third, policy makers, practitioners, and donors believe PES can achieve both poverty alleviation and ecosystem protection. Fourth, and perhaps most importantly, practitioners and international aid donors believe PES programs can become self-financing with short-term investments in PES start-up costs and ecosystem valuation (how the public-good nature of the services can be resolved by these investments has not been explained clearly). In other words, PES is perceived as more than just a tool for conservation investment. It is also perceived as a tool for conservation financing. Unfortunately, the reasons that motivate the global popularity of PES also constrain its effectiveness in achieving environmental and social objectives.I describe what is known about the environmental and social effects of PES and I outline new directions for PES research. I emphasize two points. First, greater use of PES is unwarranted unless new or expanded systems are designed explicitly to measure PES's environmental and social effects and to explore competing notions of effective contract design. Second, efforts to value ecosystem services separate from policies designed to deliver them are wasted. Estimates of the benefits of ecosystem services have no policy relevance unless they are estimated in the context of real conservation effects from real conservation programs.

Cultural Diversity, Discrimination and Economic Outcomes: An Experimental Analysis

December 1, 2005

Economists have paid increasing attention to the role of cultural diversity in explaining the variability of economic outcomes across societies. We develop an experimental framework that complements existing research in this area. We implement the framework with two cultures that coexist in an industrialized society: the Hispanic and Navajo cultures in the southwestern United States. We vary the ethnic mix of our experimental sessions in order to infer the effect of intercultural interactions on economic behavior and outcomes. We control for demographic differences in our subject pools and elicit beliefs directly in order to differentiate between statistical discrimination and preference-based discrimination. We present clear evidence that Hispanic and Navajo subjects behave differently and that their behavior is affected by the ethnic composition of the experimental session. Our experimental framework has the potential to shed much needed light on economic behavior and outcomes in societies of mixed ethnicity, race and religion. Working Paper Number 05-26

Are We Getting What We Paid For? The Need for Randomized Environmental Policy Experiments in Georgia

June 1, 2005

In the field of environmental policy, the decision to choose one policy over another should be evidence-based. Randomized policy experiments are important tools for generating evidence on the effectiveness of policies. They are an important component of policy design in fields such as poverty assistance, criminal rehabilitation, public education, and public health. In contrast, the use of randomized experiments in the field of environmental policy is nonexistent. In this short paper, I argue that randomized experiments are needed to improve environmental policy in Georgia. They can take place in the context of planned pilot initiatives and thus require little additional money to implement. Because they can be incorporated into the implementation of a field initiative, policy experiments also mitigate concerns that research and program implementation are mutually exclusive. However, the difference between what one can learn from a pilot initiative that uses a randomized design and from one that does not is enormous. We illustrate how one can use a randomized policy experiment in the context of an existing water conservation initiative in Georgia. Working Paper Number 2005-0022

Can Encouraging Voluntary Development of Environmental Management Systems Augment Existing Regulations?

June 1, 2005

Encouraging firms to voluntarily develop environmental management systems (EMSs) has been described as a potential policy tool for achieving environmental objectives in Georgia. We survey current thinking on the subject and note several shortcomings in current methods used to evaluate what motivates private firms to adopt comprehensive EMSs. Using a unique dataset of environmental management practices of Japanese manufacturers, we find that consumer pressures, regulatory pressures, and market power are major factors that motivate firms to develop comprehensive EMSs. We also find that after controlling for self-selection bias in survey response, the effects of regulatory pressures become more significant and larger in magnitude. These results suggest that although encouraging development of EMSs has the potential to augment existing regulations, the regulatory tools are fundamental to the success of such voluntary approaches. Working Paper Number 2005-0015

Can Public Goods Experiments Inform Environmental Policies?

June 1, 2005

Understanding behavior in experimental public goods games is fundamental to the work of environmental, behavioral, institutional and policy-oriented economists. Although much research has been devoted to explaining the dynamics of such experiments, the conclusions drawn to date are contradictory. Through the use of a novel experimental design, a theoretical model of behavior, and appropriate econometric methods, we address weaknesses in the current literature and resolve much of the conflicting claims about motives in public goods experiments. Our analysis demonstrates that herders and strong reciprocators are the main contributors to the public good, whereas the role of interdependent utility and warm-glow altruism is weak at best. Further, the oft-observed decay in contributions over rounds is driven by the revocation of cooperation by disappointed strong reciprocators coupled with the herding behavior of confused subjects. We find no evidence that confused subjects learn the dominant strategy over time. The data instead imply that a substantial proportion of subjects do not recognize the tension between the privately optimal strategy and the socially optimal strategy. These results offer insights into improving environmental policy, but also suggest that public goods experiments cannot achieve their full potential as long as the way in which they are implemented in the laboratory leaves most subjects unaware of the social dilemma that experimentalists are trying to induce. Working Paper Number 2005-0017

Experimental Approaches to Understanding Conflict over Natural Resources

June 1, 2005

Throughout the world, ethnic, racial and religious conflicts over limited resources persist in the face of potential settlements that plainly serve the interests of all sides. When analyzing such conflict, economists tend to ignore "non-material" aspects of decision-making such as inter- and intra-cultural relationships. Such aspects are typically analyzed by sociologists, anthropologists, and political scientists. Using an experimental approach, we demonstrate that economists can indeed make a contribution to understanding the way in which cultural relationships affect economic behavior. Specifically, we examine how the ethnic mix of experimental bargaining sessions affects economic outcomes. Using subjects from two ethnicities that co-exist in an industrialized society, the Hispanic and Navajo cultures in the southwestern United States, we present clear evidence that subjects of different cultures behave differently and that their behavior is affected by interactions with individuals from another culture. Our experimental framework offers the potential to gain insights into the allocation of natural resources in societies of mixed ethnicity, race and religion. Working Paper Number 2005-0016

Investor Reactions to Information Disclosure: Can Providing Public Information About Firms' Pollution Improve Environmental Performance?

May 1, 2005

Information disclosure has been touted as a powerful tool to effect change in environmental quality. Nascent efforts to augment federal information disclosure have begun in Georgia. We conduct the first empirical analysis of investor reactions to a Pollutant Release and Transfer Register (PRTR) outside of the United States. In contrast to the U.S. studies, we find no evidence of negative investor reactions to firms listed on Japan's PRTR. We identify several institutional reasons for these contradictory results. Our results suggest that PRTRs may not have the same effect in all locations and thus further empirical studies of the burgeoning number of PRTRs being implemented globally are warranted. Working Paper Number 2005-0014

Targeting Conservation Investments in Heterogeneous Landscapes: A distance function approach and application to watershed management

January 31, 2003

To achieve a given level of an environmental amenity at least cost, decision-makers must integrate information about spatially variable biophysical and economic conditions. Although the biophysical attributes that contribute to supplying an environmental amenity are often known, the way in which these attributes interact to produce the amenity is often unknown. Given the difficulty in converting multiple attributes into a unidimensional physical measure of an environmental amenity (e.g., habitat quality), analyses in the academic literature tend to use a single biophysical attribute as a proxy for the environmental amenity (e.g., species richness). A narrow focus on a single attribute, however, fails to consider the full range of biophysical attributes that are critical to the supply of an environmental amenity. Drawing on the production efficiency literature, we introduce an alternative conservation targeting approach that relies on distance functions to cost-efficiently allocate conservation funds across a spatially heterogeneous landscape. An approach based on distance functions has the advantage of not requiring a parametric specification of the amenity function (or cost function), but rather only requiring that the decision-maker identify important biophysical and economic attributes. We apply the distance-function approach empirically to an increasingly common, but little studied, conservation initiative: conservation contracting for water quality objectives. The contract portfolios derived from the distance-function application have many desirable properties, including intuitive appeal, robust performance across plausible parametric amenity measures, and the generation of ranking measures that can be easily used by field practitioners in complex decision-making environments that cannot be completely modeled. Working Paper # 2002-011

Optimizing The Riparian Buffer: Harold Brook In The Skaneateles Lake Watershed, New York

November 1, 2002

The use of riparian land buffers to protect water quality for human consumption and wildlife habitat has become an important conservation tool of both government and non-government agencies. The funds available to acquire private lands for riparian buffers are limited, however, and not all land contributes to water quality goals in the same way. Conservation agencies must therefore identify effective ways to allocate their scarce budgets in heterogeneous landscapes. We demonstrate how the acquisition of land for a riparian buffer can be viewed as a binary optimization problem and we apply the resulting model to a case study in New York (JEL Q15, Q25). Working Paper # 2002-009

Conservation Contracting in Heterogeneous Landscapes: an application to watershed protection with threshold constraints

October 31, 2001

A key issue in the design of land use policy is how to integrate information about spatially variable biophysical and economic conditions into a cost-effective conservation plan. Using common biophysical scoring methods, in combination with economic data and simple optimization methods, we illustrate how one can identify a set of priority land parcels for conservation investment. We also demonstrate a way in which conservation agencies can incorporate concerns about biophysical thresholds in the identification of their priority land parcels. We apply these methods using Geographic Information System data from a New York conservation easement acquisition initiative for water quality protection. Working Paper # 2002-010