Supporting Private Provision of Ecosystem Services through Contracts: Evidence from Lab and Field Experiments

The free riding incentive that exists in public good provision has been a major obstacle to establishing markets or payment incentives for ecosystem services. The use of monetary incentives to induce private provision of public goods has gained increasing support, including from the USDA Office of Environmental Markets, to help to market ecosystem services provided by alternative farmland management practices. Using a series of lab experiments and a pilot field experiment, we explore new ways to raise money from individuals to pay farmers for alternative management practices. In our proposed mechanisms, individuals receive an assurance contract that offers qualified contributors an assurance payment as compensation in the event that total contributions fail to achieve the threshold needed to fund the public good. Contributors qualify by contracting to support provision with a minimum contribution. Our public good involves delaying the harvest of a ten-acre hayfield to allow grassland birds to nest successfully. Evidence from lab experiments shows that the provision probability, consumer surplus, and social welfare significantly increase when the assurance contract is present, while the producer surplus suffers from a slight decrease. Consistent with the theory and the lab experiment, we show that the individual contribution is determined by the value range and the assurance payment level in the pilot field experiment. Our proximate motivation is to support bird habitat provided by farmland, but our approach contributes to the private provision of ecosystem services and other types of public goods in general. Keyword: Assurance Payments, Public Good Provision, Multi-units Provision, Experimental Economics, Individualized Pricing, Ecosystem Service