Greater Flexibility in Payments for Ecosystem Services: Evidence from an RCT in the Amazon

Abstract

In Payment for Ecosystem Services (PES) programs, incentive payments conditional on zero deforestation do not always match the time profile of landowners' opportunity costs. In this study, we examine the impact of adding some flexibility to PES contracts to allow landowners the possibility of receiving part of the financial incentive if some deforestation is detected during the contract period. We ran a pilot PES program in the Brazilian Amazon during the last years of Jair Bolsonaro's mandate, at a time when incentives to deforest were strong. Using the Becker-DeGroot-Marschak (BDM) mechanism, we implemented a PES procurement auction to elicit landowners' reservation prices for forest conservation. We embedded the BDM auction in a randomized controlled trial (RCT), which included one control group and two PES treatment groups of about 150 voluntary landowners each. In line with theoretical predictions, we found that, while the flexible PES contract allowing some deforestation saved slightly more forest, the fixed payment contract requiring zero deforestation exhibited a higher benefit-cost ratio.