Private resource management and public trust: optimal design of forest conservation contracts in Ontario

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Huennemeyer, Anne-Juliane

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University of Guelph

Abstract

This study addresses optimal contract design between a regulator and private natural resource managers, who are entrusted to manage a public domain resource for the joint maximization of commercial and public benefits. In particular, the study explores the efficiency implications of incentive-compatible contracts under asymmetric information when used as a regulatory instrument for protecting public resource values. This study makes three main contributions to its field. It develops a principal-agent model to tackle the information problems of hidden effort and hidden type simultaneously. Secondly, the model developed in this study explicitly shows the agency cost of different information scenarios, and conceptualizes the welfare implications associated with delegating resource management tasks from public to private decision makers. Thirdly, it provides guidance for the use of incentive - compatible conservation contracts as a policy instrument in complex information environments, and analyses the optimal information environment between regulator and regulated. The model developed in this study is similar to Wu and Babcock (1995 and 1996) who focus on the information problem of privately known pollution abatement costs. The present study extends their work in that it recognizes a hidden effort problem, due to prohibitively costly monitoring of individual conservation efforts and stochastic conservation outcomes. Numerical simulations support and extend theoretical findings regarding the contract structures, contracting inefficiencies, conservation costs, risk aversion, the quality of the signal, and the additivity of agency costs. At the policy level, this study provides guidance for welfare maximization in asymmetric information environments. Using incentive-compatible conservation contracts as a regulatory tool when delegating resource management responsibilities from a public agency to private decision makers necessitates the determination of the optimal degree of information asymmetry between regulator and firms. Retaining access to information, or investing in additional monitoring to enlarge the regulator's information set is reasonable, if this is less costly than using incentive-compatible contracts. While applicable to a wide array of resource management contexts, this thesis uses forest management in Ontario as an explicit example for demonstrating possible informational implications of institutional changes, and for developing the theoretical model under different information environments. It analyses the institutional arrangements of Crown forest management in Ontario, and anticipates efficiency problems of asymmetric information based on an information economics critique.

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Keywords

contract design, regulator, private resource management, natural resource, public domain, commercial benefits, public benefits, incentive-compatible contracts, regulation

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