Contractual Difficulties in Environmental Management and the Protection of Biodiversity: The Case of Conservation and Mitigation Banking

This paper offers a principal-agent model of feasible private contracting in mitigation and conservation banking aimed at the protection of natural habitat and bio-diversity of US wetlands and uplands. It is shown that while it is straightforward to design an incentive contract, such a contract may not achieve the federally mandated objective of no net loss of habitat. This is because the minimum payment required as an economic incentive to private agents may be greater than what they should receive for the habitat values that they actually created in the field. This possible problem is shown to derive from nonconvexity in the production possibility set between the biological value of land as natural habitat and in non-habitat uses such as in urban development. The paper concludes with a consideration of several institutional devises that may promote the convergence of private contracting and the attainment of no net loss. These include the payment of subsidies, greater accuracy in the identification of actual quality by the principal, and the use of several incentive alignment devises.

Tax Collection in History

Methods of tax collection employed by modern governments seem dull when compared to the rich variety observed in history. Whereas most governments today typically use salaried agents to collect taxes, various other types of contractual relationships have been observed in history, including sharing arrangements which divide the tax revenue between the government and collectors at fixed proportions, negotiated payment schemes based on the tax base, and sale of the revenue to a collector in exchange for a lump-sum payment determined at auction. We propose an economic theory of tax collection that can coherently explain the temporal and spatial variation in contractual forms. We begin by offering a simple classification of tax collection schemes observed in history. We then develop a general economic model of tax collection that specifies the cost and benefits of alternative schemes and identifies the conditions under which a government would choose one contractual form over another in maximizing the net revenue. Finally, we use the conclusions of the model to explain some of the well-known patterns of tax collection observed in history and how choices varied over time and space.