Optimizing contract allocation for risky conservation tenders

Abstract

In the face of a shrinking budget for environmental activities, conservation agencies must design and implement agri-environmental policies that cost-effectively meet the environmental objectives. However, designing such programs is often challenging due to different uncertainties. For example, landholders may be exposed to risks when carrying out conservation projects. To minimise the negative impact of unexpected losses, landholders may require additional financial incentives as compensation for undertaking “risky” conservation projects. In such situations, the conservation agency risks over-spending public funds because of prohibitively high opportunity costs from landholders or failing to meet the environmental target. We used analytical and simulation approaches to explore optimal budget allocation in a target-constrained conservation tender. We also compared the performance of the tender with and without own-cost uncertainty. Results showed that as landholders’ own-cost uncertainty rises, the conservation agency is forced to allocate more funding to secure the same level of the environmental target. We found that the optimal funding level is sensitive to landholders’ competition uncertainty and the magnitude of expected losses.