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Real Options Conference 2022

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Optimal subsidies for land conservation

We build a real options model to investigate the optimal amount of payments to landowners for conservation and the optimal timing of their introduction. Such subsidy contracts, which require landowners to conserve land and preclude development, can be used to increase ecosystem services (ESS) provided by the land and/or preserve existing ESS, which would be lost if development occurs. They enhance ESS provision both directly, once the contract has been accepted by the landowner, and also indirectly, by delaying development.

Governments and other public bodies trade off the value of the flow of ESS benefits generated by the land with the costs of providing the subsidy. Increasing the (permanent) level of subsidy increases the government's cost and hence reduces value once the landowner accepts the conservation contract, but increases the present value of the ESS benefits by increasing the expected time until development occurs. The level of subsidy that maximises expected ESS value net of subsidy costs thus varies with the relative proximities of the development and conservation contract acceptance thresholds. Assuming that the announcement of a subsidy level is irreversible, we determine the optimal subsidy level and threshold at which the announcement is made. We plan to investigate the impacts on landowner thresholds and optimal subsidies of different expected conservation contract durations and political risk, whereby such subsidised conservation contracts are available only temporarily.

A Elizabeth Whalley
Warwick Business School
United Kingdom

 


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