Should we pay for ecosystem service outputs, inputs or both?

Ben White*, Nicholas David Hanley

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    16 Citations (Scopus)


    Payments for ecosystem service outputs have recently become a popular policy prescription for a range of agri-environmental schemes. The focus of this paper is on the choice of contract instruments to incentivise the provision of ecosystem service outputs from farms. The farmer is better informed than the regulator in terms of hidden information about costs and hidden-actions relating to effort. The results show that with perfect information, the regulator can contract equivalently on inputs or outputs. With hidden information, input-based contracts are more cost effective at reducing the informational rent related to adverse selection than output-based contracts. Mixed contracts are also cost-effective, especially where one input is not observable. Such contracts allow the regulator to target variables that are “costly-to-fake” as opposed to those prone to moral hazard such as effort. Further results are given for fixed price contracts and input-based contracts with moral hazard. The model is extended to include a discussion of repeated contracting and the scope that exists for the regulator to benefit from information revealed by the initial choice of contract. The models are applied to a case study of contracting with farmers to protect high biodiversity native vegetation that also provides socially-valuable ecosystem services.

    Original languageEnglish
    Pages (from-to)765-787
    Number of pages23
    JournalEnvironmental and Resource Economics
    Issue number4
    Early online date1 Mar 2016
    Publication statusPublished - 1 Apr 2016


    • Adverse selection
    • Biodiversity
    • Moral hazard
    • Payments for ecosystem services
    • Principal-agent models


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