Private Resource Management And Public Trust: Optimal Resource Conservation Contracts Under Asymmetric Information

We analyse efficiency problems of incentive-compatible contracts under moral hazard and/or adverse selection in the context of private resource management. The paper contributes to defining the regulatory role in creating an optimal information environment between regulator and private resource managers to maximize welfare from a mixed public-private good. The optimal contract structures developed in a principal-agent framework induce self-selection and type-specific conservation efforts. The associated contracting inefficiencies, however, are increasing in the degree of information asymmetry across scenarios, the total costs of conservation, and the difference in conservation costs across types. The results of this study imply that conservation contracts to mitigate problems of moral hazard and adverse selection are welfare improving if efficiency gains from private management outweigh the inefficiencies associated with incentive compatible contract design. Alternatively, the regulator can choose to retain information on 'types' and 'effort' during institutional transformations.