Green payment programs, asymmetric information and the role of fixed costs

Many conservation programs offer financialcompensation to farmers in exchange for socially desiredservices, such as soil conservation or biodiversity protection.Realization of the conservation objective at minimum costrequires payments to just cover the extra costs incurred byeach individual (type of) farmer. In the presence ofinformation asymmetries regarding costs, incentive-compatiblecontracts can be designed to mitigate excess compensation, butthese typically only provide partial improvement because ofseveral distortions. We argue that these distortions areinevitable only if all conservation costs are variable in nature.If there are fixed costs too, we find that the least-cost solutioncan be incentive compatible. We identify the exact conditionsunder which these maximum savings can be obtained andconclude that, given the relevance of fixed costs inconservation services provision, incentive—compatiblecontracts deserve a second look.