On the Efficiency and Effectiveness of Policy Instruments for the Procurement of Environmental Services Justin Dijk!
On the Efficiency and Effectiveness of Policy Instruments for the Procurement of Environmental Services PhD Thesis, VU University Amsterdam Efficiëntie en Effectiviteit van Beleidsinstrumenten voor de Acquisitie van Ecosysteemdiensten Proefschrift, Vrije Universiteit Amsterdam Justin Dijk, Amsterdam, March 2015 ISBN: 978-94-6233-009-2 Cover and chapter page design by Dudok van Diepen Printed by Gildeprint, Enschede The research on which this thesis is based has been carried out at the Institute for Environmental Studies, VU University Amsterdam (www.ivm.vu.nl). This research was carried out within the framework of the Knowledge for Climate program (Governance of Adaptation, Theme 7), which was funded by the Ministry of Infrastructure and the Environment. ii
VRIJE UNIVERSITEIT On the Efficiency and Effectiveness of Policy Instruments for the Procurement of Environmental Services ACADEMISCH PROEFSCHRIFT ter verkrijging van de graad Doctor aan de Vrije Universiteit Amsterdam, op gezag van de rector magnificus prof.dr. F.A. van der Duyn Schouten, in het openbaar te verdedigen ten overstaan van de promotiecommissie van de Faculteit der Economische Wetenschappen en Bedrijfskunde op donderdag 2 juli 2015 om 11.45 uur in de aula van de universiteit, De Boelelaan 1105 door Justin Johannes Dijk geboren te Den Helder iii
promotor: prof.dr. D.P. van Soest copromotor: dr. J.H. Ansink iv
! thesis committee: prof.dr. Roy Brouwer prof.dr. Stefanie Engel prof.dr. Charles Noussair prof.dr. Jason Shogren Prof.dr. Cees Withagen v
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To my Dad vii
Acknowledgements Je bent nu dus klaar met je Master of Research CentER? or Hoe gaat het nu met je Pd.H. Economics and Business? are some of the things my parents asked me these past few years. While it annoyed me that they would say these things wrong most of the time, and I corrected them time and time again, I ve come to realize it is asking the question that matters. Mom and dad, thank you for your support during all these years. Although, if dad would still be with us, I can imagine his way of showing it would probably be something like Dit boekje is echt ideaal voor onder mijn Sudokupuzzels. Dad, I will miss your weird way of being proud the most. At the moment, my brother is also writing his dissertation, and when we talk about our work, I cannot help but look up to him. Allard, I only had to write this dissertation, you are writing one with a little boy and girl constantly demanding daddy s full attention. Nevertheless, I am convinced that you are going to deliver an excellent thesis, and I cannot wait to put your book on the shelf next to mine. During my PhD, I spent some time behind the drum kit during the dramatic, five-second rise and fall of Cancel Your Weekend (itunes 2012, Spotify 2012). On behalf of my band mates, I would like to thank everybody that helped us turn this endeavor into a (brief) success, but I would especially like to thank my supervisor Daan for giving me the opportunity to do so during my PhD. Daan, you guided me when I needed direction, always made time for me, but also let me find my own way when I felt I could achieve the targets we set on my own. Thank you for all your support and kind words during the past few years. I can only hope we will find the time for new projects to work on together in the future. The exact same amount of gratitude goes out to my co-supervisor Erik. Your stress-free attitude and your precise way of working helped me so much during the final stages of my PhD. Daan and Erik, thank you for molding me into the environmental and experimental economist I have become. Also, I would like to thank all the nice people in the Knowledge for Climate program, both in Theme 7 and HSDR3.5. Our formal and informal get-togethers were a great way to keep up with the bigger picture of our research group. Also the reading group sessions of Theme 7 were a lot of fun and very helpful in becoming familiar with the academic language of climate viii
change and the governance of adaptation at the beginning of my PhD. In particular, thank you Heleen, Hens, Marleen and Peter for our fun collaboration and the intense debates that ended up becoming a successful publication for all of us. Andrea, Arwin, Bas, Frank, Gerald Jan, Jasper and Wiebren, thank you for our fruitful HSDR3.5 sessions at Deltares and the Province of North Brabant. The artefactual field experiments could not have been performed without your help. My gratitude goes out as well to all the people at the summer school on Experimental Auctions in Bertinoro, Italy. Hillary, Laura and Kurt, I hope to see you again soon! I was lucky enough to work on my dissertation at the IVM with a very diverse group of people. As with fine wine, over the years, I have come to appreciate Trond as a silent force in our rather autistic office of oversized headphones, occasional nods of approval and, of course, the ever present concentration to do work. Our other officemates were less socially awkward, but fortunately learned to become more so over the years. Thank you Marija and Christine (and Reinhard who immediately adapted to this way of working when joining the office the last summer I spent at the IVM). I should not forget to mention Thijs, Constanze and Derek who showed me around the first days I started working at the institute, and introduced me to all the people that made it fun during but also after working hours. But who were the funniest? I very much enjoyed spending time with my colleges in the EE department, at the institute and also at all the conferences, but I have to say that, although it was not a contest, SPACE had by far the most fun group of people to be around. Hence, a tip of the hat to all of you, but let s not do a roll call here. 1 I would also like to thank the support staff, who are few in number at the time I am writing this. With the budget cuts that took place at the faculty, some of their warmth and support was unfortunately removed from the institute. Thank you Els, Marjolijn, Rayvon, Suzan and everybody else that helped me during my time here. Now as we all know, except for VU University, there is nothing noteworthy on the outside of the A10 motorway. Still, at some point I chose to leave Amsterdam and move to North Brabant to study at Tilburg University. To my surprise, I met some amazing people outside of 020.!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 1 The law of large (PhD) numbers might also explain you victory, so try to keep it up in the future. It ended as a tie between EPA and EE. I m not that sure where C&B ended up, but above EPA and EE seems only fair given that they spend most of their time in the lab below us anyway. ix
Jochem, Louis, Rob N. and Thijs, you might not feel the same passion for Amsterdam, but moving further and further away is not the solution. At least Rob N. gets it, partially. Thank you Harm, Rob van W., Pascale, Tamara, Teun and everybody else at Chateau Pinot for making it a place I look forward to visiting every year. To both these groups, let s keep honoring our fun traditions and let s keep our track record of successfully planning these things as impeccable as ever! And then there is a soccer team, containing nothing other than pure class (and Leon). However, only Jaap deserves a special mention here. If not for his amazing athletic abilities, then at least for his intelligent and fair judgment when deciding on the starting lineup every Saturday. Jaap, when we extrapolate from the deal Sam has made, I would assume that including this small paragraph gives me at least four seasons of 90 minutes per match, topped off with a nooit meer vlaggen, nooit meer wassen bonus. The last (but certainly not the least) group of people I want to thank are my friends Aad, Auke, Diana, Dudok, Emmelie, Frank, Hein, Huib, Jacco, Jasper, Jos, Krijn, Maarten, Marcel, Mark, Martin and Naomi. Dudok, thank you so much for all the time and effort you so readily invested in designing the book cover that makes this book a sight for sore eyes. And thank you for countless of other projects you designed for our friends and me over the years. Almost everybody else, thank you for not being economists. As much as I love my research, I cannot help but think that you are the ones that kept me sane over the years. Thank you for all the drinks, dinners, vacations, parties, gigs, trips, pick-me-ups, shows, movie nights, phone calls and walks, but most of all, thank you for being there for me last year. Agata, we are getting married very soon. But before we (say I) do, I want to thank you for your patience and understanding for all the late nights, weekends and vacations my mind was with this book when it should have been with you. Thank you for celebrating with me when I made progress, for always encouraging me, but mostly for always being there when I need you. Finally, Paulina, Krzysztof and Agnieszka, thank you for supporting us in all sorts of ways over the years. I feel lucky you are always there to help us out. Justin Dijk, Amsterdam, March 2015 x
Contents List of Figures xiii 1 Introduction 1 1.1 The bigger picture 2 1.2 Principal-agent problems and solutions 4 1.3 Experimental economics 6 1.4 Research questions 9 2 An Overview of Policy Instruments 13 2.1 Introduction 14 2.2 Categorizing the policy instruments 17 2.3 Assessment criteria for the policy instruments 22 2.4 Case study: Eco-friendly riverbanks 24 2.5 Conclusion 35 3 The Menu of Contracts Approach 37 3.1 Introduction 38 3.2 The model 43 3.3 Optimal conservation when land quality is predetermined 47 3.3.1 Land quality investment 47 3.3.2 The complete information solution 49 3.3.3 Is ((!!!,!!! ),(!!!,!!! )) incentive compatible? 50 3.3.4 Graphical analysis when land quality is predetermined 53 3.4 Optimal conservation when land quality is endogenous 55 3.4.1 Land quality investment 55 3.4.2 The complete information solution 56 3.4.3 Is ((!!!,!!! ),(!!!,!!! )) incentive compatible? 58 3.5 Empirical validity of the key assumptions 60 3.6 Conclusion 64 3.A Appendix 66 4 Repeated Procurement Auctions 79 4.1 Introduction 80 4.2 Experimental design 84 4.3 Experimental results 88 xi
4.4 Conclusion 95 4.A Appendix 97 5 Wildlife Corridor Auctions 115 5.1 Introduction 116 5.2 A corridor auction model 119 5.3 Simulation framework and scenarios 127 5.4 Simulation results 130 5.5 Conclusion 139 5.A Appendix 140 6 Trust and Control 149 6.1 Introduction 150 6.2 The game and the experimental design 153 6.3 Experimental results 158 6.4 Conclusion 171 7 Conclusions and Discussion 173 References 182 Nederlandse Samenvatting (Dutch Summary) 206 xii
List of Figures 1.1 From the lab to the field. 8 2.1 Eco-friendly riverbanks (before and after). 26 2.2 Opportunity costs of Dutch farmers. 29 3.1 Example of a first-best menu of contracts (!!!,!!! ) that is 52 incentive compatible. 3.2 Admissible (!!,!! ) combinations for which (3.15) holds. 54 4.1 Average bids per treatment over time. 90 4.2 Predicted and observed bids based on the models in Table 4.4. 93 4.3 Average accepted bids per treatment over time. 94 4.4 Bids over time in treatment D. 113 4.5 Bids over time in treatment US. 114 4.6 Bids over time in treatment UC. 114 5.1 A hypothetical landscape with eight landowners. 126 5.2 Landscape based on a 3 3 grid used in the auction 128 simulations. 5.3 Average winning coalition bids. 132 5.4 Average participation rates. 133 5.5 Average winning coalition bids (AB2 and BO2). 134 5.6 AB/AB2 and BO/BO2 winning offer distributions for V = 70 135 and!! [1, 10]. 5.7 Viable corridors and unconnected coalitions. 141 5.8 Number of coalitions an individual landowner is able to join. 142 5.9 Average coalition windfall profits. 146 5.10 Average coalition windfall profits (AB2 and BO2). 146 6.1 Relative frequency of considerations by treatment. 169 6.2 Relative frequency of considerations by subject pool. 171 xiii
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