The role of private information in designing conservation incentives for property owners

Most people interested in protecting endangered species would agree that imperfect information about population biology and the role of species in ecosystems confounds the design of preservation policy. In like manner, imperfect information about economic behavior and preferences further complicates preservation policy design and implementation. For instance, a private landowner might be the only individual who knows a listed species is on his or her land. In such a case the government would need landowner cooperation to gain the information necessary to administer conservation policy. If, however, regulation leads to an unattractive economic outcome, the landowner will likely withhold the biological information from government officials. Hence, information asymmetries between landowners and the government can potentially introduce an additional set of issues revolving around the landowners' incentives to reveal information. Asymmetric information problems are pervasive in the economy, both in private transactions and government policies. Economists typically are interested in two types of asymmetric information: hidden action and hidden information. In hidden action problems one economic agent takes an action that affects the well-being of another, and the action of the former is unobservable to the latter. Under hidden information the parties to a transaction have different information about an important aspect of the transaction. Both problems can manifest in different ways and are especially problematic when policies designed in their presence need to be voluntary. As an example of hidden information, assume that to protect a listed species the government is willing to purchase landholder use rights. Typically only the landowner will know his or her true land valuations. If so, and if the government is concerned with containing costs, then the landholder's private information may present the government with a problem. The landowner will typically want as large a payment as possible for his use rights, while the government will typically want to purchase the land as cheaply as possible. In such a case we say the landowner and the regulator's incentives are incompatible, or we have an incentive compatibility problem. A likely result of this incentive compatibility problem is that at the margin the government's payment to the landowner will be greater than the landowner's actual valuation. Absent asymmetric information over land values the government may have been able to purchase the land more cheaply, so that at the margin payments received by landowners would be equal to their true land valuations. Under asymmetric information resources will likely be wasted and the benefits of market exchange not fully realized (Stiglitz 1996, p. 35).¹ Although information occupies a central role in any economy (Hayek 1945), only in the last three decades has the field incorporated the consequences into our formal models. We know well that information about prices, about production processes, about consumer preferences, or, more to the subject at hand, about the impact of economic activity on the habitat that shelters endangered and threatened species is critical to market exchanges and successful policymaking. Now economists have begun to address the importance of information explicitly ("about time," some might say), by moving it to the forefront of economic analyses, a move that arguably represents one of the most important advances in the economics discipline over the period. This chapter explores how the lack of information about economic behavior affects the design of economic incentives to protect endangered species on private land. We begin with a general discussion of asymmetric information and why it matters. Our goal here is to convince the reader that asymmetric information is not just some academic exercise but is a real problem. We offer as two examples the insurance industry, where the consumer and the company have different information, and the public utility industry, where the company and the government regulator have different information. Then we look at how asymmetric information affects the design of incentives for private landowners to preserve endangered species. The fourth section discusses whether the data needed to implement the economic prescriptions are, or ever will be, available. We conclude by arguing that imperfect information about economic behavior is as fundamental to effective species protection policy on private land as is dealing with imperfect information about natural systems.