Mechanism Design in Payment for Ecosystem Service Schemes

Abstract

This thesis uses theory and experiments - both in the field and in the laboratory - to explore two key instances of asymmetric information arising in the context of Payments for Ecosystem Service (PES) mechanism design.

The first paper examines monitoring individual behaviours to overcome the problem of hidden (in)action. We build upon work in the point- and non-point source pollution literature. We first suggest that these two regulatory challenges are two extremes of a continuous spectrum. From this key insight, we propose, and explore both in theory and a laboratory experiment, a mechanism for incentivising action when individual-level monitoring is costly. This novel mechanism achieves truly least cost effort - minimising direct and monitoring costs - unlike the standard prescription of a Pigouvian payment.

The latter two papers focus on hidden information regarding costs that participants face in PES schemes. They consider how reverse auctions may overcome this asymmetric information, comparing the performance of two key pricing rules. Under “pay-as-bid” (PaB) pricing, all winning bids are paid the amount specified in the bid. In “uniform price” (UP) auctions, all winning bids are paid the amount of the marginal bid. The laboratory experiment supports the adoption of PaB pricing. Yet that finding does not translate to the field. Indeed, the first field experiment in this setting (reported in the third paper), finds that the UP rule - oft-neglected by PES - outperforms PaB pricing on a range of measures. These contradictory results suggest that the ranking we find in the field cannot be solely explained by participants necessarily dividing their attention between auction bidding and their other productive activities.

This thesis thus offers novel and profound insights on two of the key problems facing PES mechanism design.