Incentives for wetland creation

When information about soil quality is complete, wetland creation with a take-it-or-leave-it contract, which specifies wetland size and transfer, yields higher social benefits than if a uniform contract, which offers a payment proportional to the wetland size, had been used. This result points to a paradox because uniform contracts have been used a lot in practice. This article concentrates on the presence of asymmetric information about soil quality as a possible explanation for this paradox. It shows that the choice of instrument for wetland creation has welfare implications. Different contracts typically yield quite different social welfare surpluses and distribution between interest groups. It is not obvious, which of four contracts studied dominates when a farm characteristic affecting costs is unknown to the social planner. The probability distribution of the characteristic, the size of the excess burden, the elasticity of costs and benefits to wetland size and the cost of acquiring missing information influence the outcome.