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Incentive Systems for Forest-Based Ecosystem Services with Missing Financial Service Markets

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  • Eli P. Fenichel
  • Wiktor Adamowicz
  • Mark S. Ashton
  • Jefferson S. Hall

Abstract

Payments for ecosystem services (PES) is a popular paradigm to address underprovision of ecosystem services in developing economies. Potential PES recipients often experience other market imperfections, which can influence PES uptake and environmental performance. These include poorly functioning financial services markets. We develop a model of nonindustrial timber production with poorly functioning financial service markets and PES. We calibrate the model to the Panama Canal Watershed and solve the dynamic allocation decision using dynamic programming. The results of our model show that improving financial services markets, including improved access to borrowing and savings, can reduce the costs of acquiring ecosystem services. Nonenvironmental market frictions can influence the incentive properties of PES payment vehicles. Our model predicts that wealthier individuals are likely to provide the desired land uses at least cost if incentivized land uses involve production. In these cases cost-effective PES is unlikely to advance development objectives.

Suggested Citation

  • Eli P. Fenichel & Wiktor Adamowicz & Mark S. Ashton & Jefferson S. Hall, 2019. "Incentive Systems for Forest-Based Ecosystem Services with Missing Financial Service Markets," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 6(2), pages 319-347.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/701698
    DOI: 10.1086/701698
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    Citations

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    Cited by:

    1. Katherine Sinacore & Edwin H. García & Alex Finkral & Michiel Breugel & Omar R. Lopez & Carlos Espinosa & Andrea Miller & Theodore Howard & Jefferson S. Hall, 2023. "Mixed success for carbon payments and subsidies in support of forest restoration in the neotropics," Nature Communications, Nature, vol. 14(1), pages 1-13, December.
    2. Berry, Kevin & Fenichel, Eli P. & Robinson, Brian E., 2019. "The ecological insurance trap," Journal of Environmental Economics and Management, Elsevier, vol. 98(C).
    3. Edward B. Barbier & Angela Cindy Emefa Mensah & Michelan Wilson, 2023. "Valuing the Environment as Input, Ecosystem Services and Developing Countries," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 84(3), pages 677-694, March.
    4. Yukiko Hashida & Eli P. Fenichel, 2022. "Valuing natural capital when management is dominated by periods of inaction," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(2), pages 791-811, March.
    5. Lloyd-Smith, Patrick & Adamowicz, Wiktor & Entem, Alicia & Fenichel, Eli P. & Rouhi Rad, Mani, 2021. "The decade after tomorrow: Estimation of discount rates from realistic temporal decisions over long time horizons," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 158-174.
    6. David J. Pannell & Wiktor L. Adamowicz, 2021. "What Can Environmental Economists Learn from the COVID‐19 Experience?," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 43(1), pages 105-119, March.

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