Can informational rents ever be avoided? Optimal conservation programs, endogenous investments, and heterogeneity in land owner preferences

Nature conservation policies are typically voluntary programs in which land owners are paid to provide environmental services. We consider the case in which land owners differ in the rate at which they discount the future. Preference heterogeneity has two important consequences. First, even though there is just one fundamental source of heterogeneity, farmers are likely to differ in several respects that are relevant for conservation programs. They do not just value the same per-period bene t and cost ows differently, their perperiod bene t and cost ows are likely to differ too. Decisions like how much to invest in land quality are determined by time preferences, and differences in land quality can make conservation more or less costly. If farmers differ in two or more respects, we may be able to design a mechanism that is able to reduce the program's informational rents to zero. Second, if land quality investments are at least partly driven by farmer preferences, the government should take into account that land qualities may change in response to the introduction of the program. We nd that preference heterogeneity can indeed cause the rst-best conservation policy to be incentive compatible even in the presence of information asymmetries. Please send all correspondence to: Daan van Soest, VU University Amsterdam, Department of Spatial Economics, De Boelelaan 1105, 1081 HV Amsterdam, The Netherlands; email: d.p.van.soest@vu.nl, tel: +31–20–598 6164; fax: +31–20–598 6004. Justin Dijk and Daan van Soest gratefully acknowledge the nancial support from the “Knowledge for Climate” research program (as part of theme 7). Carmen Arguedas is grateful for the nancial support of the Spanish Government under research project number ECO2011-25349.