The impact of inaccurate and costly assessment in payments for environmental services

Paying private landholders for environmental services, rather than input-based payments, has been proposed as a way to improve the performance of contracts for conservation agencies. A challenge is that the assessment of environmental services is subjective, raising the question of how assessment accuracy impacts on landholder behaviour and contract design. A model is developed of a contract between a conservation agency and a private landholder for the provision of environmental services. The model is used to estimate the impact of inaccurate and costly assessment on the optimal landholder labour effort and the optimal incentive payment. The model shows that inaccurate and costly assessment reduces the cost-effectiveness of the contract. Application of the model to Western Australian broad acre agriculture suggests that remote assessment by field assessment by a scientist is preferred to remote assessment by satellite. The study also shows the feasibility of contracts for environmental services is potentially dependent on the ability of the conservation agency to observe the landholder's behaviour during the contract.