Environmental Risk Negatively Impacts Trust and Reciprocity in Conservation Contracts: Evidence from a Laboratory Experiment

Conservation contracts between a landholder and an agency are characterised by information asymmetries since monitoring is incomplete and the provided outcome is often not verifiable. This contractual relationship is complicated by environmental risk, e.g. climatic conditions, that are often observable for the landholder, only. It was tested whether environmental risk is detrimental to the establishment of a reciprocal payment-effort relationship in an experimental auction-market for a public good. In this market, auction winning sellers either reinvest their contract payment in a public good or behave opportunistically and exploit information rents. The data show that environmental risk increases opportunistic behaviour of some sellers and disturbs the formation of effective, reciprocal contract relationships between the contracting buyers and sellers. Buyers do no longer trust sellers, pay minimal payments and break up after negative shocks. Repeated interaction mitigates the influence of environmental risk by benefitting contract enforcement and increasing efficiency due to higher reinvestment shares of payments, although the effect is less strong than in a comparable environment without risk. These results suggest that in a variable environment competitive bidding might be a less suitable mechanism for allocating conservation funds.