Time inconsistent resource conservation contracts

Are certain types of commonly observed resource conservation contracts inefficient? In this paper we construct a model embodying realistic characteristics of resource contracts. We find that resource contracts that share these characteristics are economically inefficient. This inefficiency stems from a time-inconsistency inherent in the contracts. There are two possible ways to overcome this time-inconsistency. The first is to employ a sufficiently large penalty for early termination of the contract. The second and possibly easier method is to offer an upward sloping conservation payment schedule so far overlooked by policy makers. Under this payment schedule, the agentʹs ex ante and ex post contract choices coincide, social externalities are fully internalized, and the contractual outcome is economically efficient even in the absence of a penalty for early termination.