smart subsidies for conservation jason shogren university of wyoming october 2005

Smart Subsidies for Conservation

Jason ShogrenUniversity of Wyoming

October 2005

On-going research with:– Todd Cherry

– Peter Frykblom

– Terry Hurley

– Stephan Kroll

– Chris McIntosh

– Greg Parkhurst

– Chad Settle

– Dave Finnoff

Homo economicus?

Conservation on private lands

• Biological Needs

• Political Realities

• Economic Incentives

ESA policy

Endangered Species Act of 1973 in the US

• Habitat Conservation Plans

• Compensation question

Experimental Economics

• Interactions between humans and nature through institutions

Rule of One

• One person is enough to make a market…

• One person is enough to break a game.

• This distinction makes a difference if you are relying on rational choice theory to guide land management and environmental policy.

• It makes a bit more sense if people make, or act as if they make, consistent and systematic choices toward certain and risky events.

Range of actors

Hamlet Econobot

Machiavelli

Markets

No Markets

Missing Markets

• Land policy and environmental policy is about structuring incentives– What do we know about how people

react to incentives– How this affects nature– How this feedback loop affects people– And so on

Agglomeration Bonus

Bonus*Retired Parcel

 Bonus*

 Bonus*

 Bonus*

    Retired Acre

 Bonus*

 Bonus*

 Bonus*  

 Bonus*

Coordination Game

• Multiple Nash equilibria

• Payoff Dominance

• Risk Dominance

Coordination failure

• Coordination failure—any outcome other than the first best solution

• 2 forms of coordination failure:

– fragmentation– second best outcomes of contiguous

habitat reserves.

Definitions

• Biological efficiency –the number of borders shared between conserved parcels relative to the optimal number of shared borders

• Economic Efficiency –the percentage of possible rents earned by the group as a whole.

Payoff Matrix—Transfers w/ an Agglomeration Bonus

Actions

Player 2              

Player 1 1 2 3 4 5 6 7 8

1 60 60 60 105 60 95 60 85 60 111 60 109 60 101 60 99

2 105 60 105 105 105 95 105 85 105 111 105 109 105 101 105 99

3 95 60 95 105 95 95 95 85 95 111 95 109 95 101 95 99

4 85 60 85 105 85 95 135 135 85 111 85 109 105 121 115 129

5 111 60 111 105 111 95 111 85 111 111 111 109 111 101 111 99

6 109 60 109 105 109 95 109 85 109 111 109 109 109 101 109 99

7 101 60 101 105 101 95 121 105 101 111 101 109 121 121 121 119

8 99 60 99 105 99 95 129 115 99 111 99 109 119 121 129 129

The Grid Game

• 10x10 spatial grid with 100 cells• 4 players• Each owns 25 cells• Retire up to 6 parcels• Creates ~68,000+ strategies • (68,000)4 potential outcomes• Agglomeration Bonus Menu

Symmetric land grid2 2 2 2 2 2 2 2 2 2

4 4 4 4 4 4 4 4 4 4

6 6 6 6 6 6 6 6 6 6

8 8 8 8 8 8 8 8 8 8

10 10 10 10 10 10 10 10 10 10

10 10 10 10 10 10 10 10 10 10

8 8 8 8 8 8 8 8 8 8

6 6 6 6 6 6 6 6 6 6

4 4 4 4 4 4 4 4 4 4

2 2 2 2 2 2 2 2 2 2

Conservation Objectives

• Corridor

• Core

• Cross

• Corners

Corridor

Core

Cross

Corners

Subsidies

• Four subsidies within the subsidy menu mechanism:

– Per conserved habitat acre subsidy; – Own shared border – Row shared border subsidy– Column shared border subsidy

• Subsidies = + / – / 0.

Own Shared Border Bonus

Row Shared Border Bonus

Column Shared Border Bonus

0

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Incentive Constraints

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)3,5()2,5()4,4()4,3(

)6,1()6,2()6,3()6,4(

)6,10()6,9()6,8()6,7(

)5,10()5,9()5,8()5,7(

)5,1()5,2()5,3()5,4(

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)7,8()7,7()6,8()10,6()9,6()8,6(

)7,3()7,4()6,3()10,5()9,5()8,5(

)4,8()4,7()5,8()3,6()2,6()1,6(

)4,3()4,4()5,3()3,5()2,5()1,5(

)7,3()6,3()8,4()8,5(

)7,8()6,8()8,7()8,6(

)4,8()5,8()3,7()3,6(

)4,3()5,3()3,4()3,5(

)10,7()9,7()8,7()7,7()6,7(

)1,7()2,7()3,7()4,7()5,7(

)10,4()9,4()8,4()7,4()6,4(

)1,4()2,4()3,4()4,4()5,4(

23

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CB

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)7,8()7,7()6,10()6,9(

)4,8()4,7()5,10()5,9(

)4,4()4,3()5,1()5,2(

)7,8()6,9(

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OB

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CB

Agglomeration Bonus MenuPer Brown

Own Border

Row Border

Column Border

Corridor $3 $8 $16 $0

Core 3 16 13 8

Cross 3 19 16 16

Corners 3 8 - 5 - 5

Figure 2. Grid Game Nash Equilibria

Pareto Dominant Nash Equilibrium (1)

Earnings: 227 per player

Each player must have: 5 Brown cells—All $10 4 shared own borders 5 shared row borders

0 shared column borders

Pareto Dominated Nash Equilibria

Earnings: 213 per player

Each player must have: 5 Brown cells—4-$10, 1-$8

4 shared own borders 4 shared row borders

0 shared column borders

Pareto Dominated Nash Equilibria

Earnings: 207 per player

Each player must have: 5 Brown cells—3-$10, 2-$8

5 shared own borders 3 shared row borders

0 shared column borders

Pareto Dominated Nash Equilibria

Earnings: 195 per player

Each player must have: 5 Brown cells—2-$10, 2-$8, 1-$6

5 shared own borders 2 shared row borders

0 shared column borders

Risk Dominant Nash Equilibria

Earnings: 191 per player

Each player must have: 5 Brown cells—2-$4, 3-$2

5 shared own borders 0 shared row borders

0 shared column borders

Experiment Design Ten structural elements:

– Treatments: A-B-A design– Players/matching—4 randomly matched each

round – Land grid– Subsidies– Strategies—brown out cells– Grid Calculator– Communication—pre-play cheap talk– Information—common knowledge about

payoffs and strategies in a round. Private information for accumulated payoffs

– History– Procedures—standard protocol/computer

Core—Round 1

Core—Round 2

Core—Round 3

Core—Round 4

Core—Round 5

Core—Round 6

Core—Round 7

Core—Round 8

Core—Round 9

Core—Round 10

Corridor—Round 11

Corridor—Round 12

Corridor—Round 13

Corridor—Round 14

Corridor—Round 15

Corridor—Round 16

Corridor—Round 17

Corridor—Round 18

Corridor—Round 19

Corridor—Round 20

Core—Round 21

Core—Round 22

Core—Round 23

Core—Round 24

Core—Round 25

Core—Round 26

Core—Round 27

Core—Round 28

Core—Round 29

Core—Round 30

Corridor-Core-Corridor

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Round

Economic Efficiency

Group 1 Group 2 Group 3 Group 4

Corner-Core-Corner

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Round

Economic Efficiency

Group 1 Group 2 Group 3 Group 4

New Research

• Asymmetric land values

• Combine agglomeration bonus with other incentive mechanisms (TDRs)

Asymmetric Land Values

U participant Column participant

20 20 20 30 30 30 40 40 40 40 20 20 30 30 30 40 40 40 40 40 20 30 30 30 40 40 40 40 40 40 30 30 30 40 40 40 40 40 40 40 30 30 40 40 40 40 40 40 40 40

40 40 40 40 40 40 40 40 40 50 40 40 40 40 40 40 40 40 50 50 40 40 40 40 40 40 40 50 50 50 40 40 40 40 40 40 50 50 50 50 40 40 40 40 40 50 50 50 50 50 Row Participant Adjacent Participant

Target Habitat

Figure C. Illustrative Example—No Subsidy

Round 1 Round 2 Round 3 Round 4

Round 5 Round 6 Round 7 Round 8

Round 9 Round 10 Round 11 Round 12

Round 13 Round 14 Round 15 Round 16

Round 17 Round 18 Round 19 Round 20

Figure D. Illustrative Example—Simple Subsidy

Round 1 Round 2 Round 3 Round 4

Round 5 Round 6 Round 7 Round 8

Round 9 Round 10 Round 11 Round 12

Round 13 Round 14 Round 15 Round 16

Round 17 Round 18 Round 19 Round 20

Figure E. Illustrative Example—Agglomeration Bonus

Round 1 Round 2 Round 3 Round 4

Round 5 Round 6 Round 7 Round 8

Round 9 Round 10 Round 11 Round 12

Round 13 Round 14 Round 15 Round 16

Round 17 Round 18 Round 19 Round 20

Agglomeration Bonus without Communication

Entire Matrix—Bonus Specification• Per brown cell bonus Tokens = 20• Own shared border bonus Tokens = 50• Row shared border bonus Tokens = 24• Column shared border bonus Tokens = 22

Tradable Permit-Pilot treatments

Table 1. Desired Outcome Dominant Nash Equilibrium A B 40 40 40 40 40 50 50 50 50 50

40 40 40 40 40 40 50 50 50 50

40 40 40 40 40 40 40 50 50 50

40 40 40 40 40 40 40 40 50 5040 40 40 40 40 40 40 40 40 50

30 30 40 40 40 40 40 40 40 50

30 30 30 40 40 40 40 40 40 50

20 30 30 30 40 40 40 40 40 50

20 20 30 30 30 40 40 40 40 5020 20 20 30 30 30 40 40 40 50

C D

Tradable Permits with Subsidy Subsidy: Per Conserved Cell $0 Own Shared Border (OB) $50 Row Shared Border $0 Column Shared Border $0 Shared Borders 31 Exposed Borders 18 Opportunity Cost (OC) $570 Subsidy Payments $1550 Total Earnings $4870

Figure 3. Illustrative Example—TSARs

Round 1 Round 2 Round 3 Round 4

Round 5 Round 6 Round 7 Round 8

Round 9 Round 10 Round 11 Round 12

Round 13 Round 14 Round 15 Round 16

Round 17 Round 18 Round 19 Round 20

Figure 4. Illustrative Example—TSARs w/Agglomeration Bonus

Round 1 Round 2 Round 3 Round 4

Round 5 Round 6 Round 7 Round 8

Round 9 Round 10 Round 11 Round 12

Round 13 Round 14 Round 15 Round 16

Round 17 Round 18 Round 19 Round 20

Weak Bioeconomic Efficiency

Efficiency

Cheap Talk, 6-10

NO Chat, 16-20

Cheap Talk, 11-20

NO Chat, 11-16

NO Chat, 6-10

Cheap Talk, 1-5

NO Chat, 1-5

88

90

92

94

96

98

100

70 75 80 85 90 95 100

WB

EE

Applications?

• Prairie dog towns in Montana• Wetland reserves in Mississippi• Conservation easements in North Dakota• Conservation auctions in Victoria, Australia

J Roughgarden’s Guide to Diplomatic Relations with Economists

Joan’s rules of engagement:• Know who economists are• Don’t assume the higher moral ground• Get used to their idea of valuation• Don’t underestimate them• Explain how ecology promotes economic

growth

“If you want to save the environment, don’t hug a tree, hug an economist.”

Bill Moyers, Commentator for US Public

Broadcasting System (PBS)