Asymmetric information and contract design for payments for environmental services

In contractual relationships involving payments for environmental services, conservation buyers know less than landowners know about the costs of contractual compliance. Such asymmetric information reduces the effectiveness of payment schemes and increases the expense to implement them. To reduce these negative effects, conservation agents can take three approaches: (1) acquire information on observable landowner attributes that are correlated with compliance costs; (2) offer landowners a menu of screening contracts; and (3) allocate contracts through procurement auctions. Although current theory and empirical work provides practitioners with some insights into the relative merits of each approach, more theoretical work and experimentation in the field is necessary before definitive conclusions can be drawn.