The role of contract attributes in purchasing environmental services from landowners

Payment for environmental services (PES) contracts are a common means of acquiring public ecosystem goods or services from private landowners. Aside from the well-studied incentive problems with these contracts, such as hidden action and hidden information, a sparsely studied complication is the role of transaction costs in contract initiation and enforcement. This paper quanties both the individual and aggregate impacts of the transaction costs that arise from nonprice contract attributes, including the time requirements for contract enrollment and compliance procedures during the contract period. Individual agents were found to incur widely varying transaction costs from these attributes, but on average transaction costs comprised a signicant portion of contract willingness-to-accept. At the aggregate level, transaction costs were found to create a signicant drain on the cost-eectiveness of contracting, similar in magnitude to the ineciency created by hidden information.