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Abstract
The role of adverse selection in schemes for the procurement of ecosystem services has been
investigated by many who suggest that efficiency of these schemes is impaired by problems arising
from adverse selection. However recent research on the UK Environmental Stewardship Scheme
suggests that these types of procurement system may not be characterised by adverse selection but
by what might be more appropriately labelled as “beneficial selection”. These results are based on
the analysis of a simple theoretical model and the empirical implications are confirmed using
econometric analysis. However it is also suggested that, even with beneficial selection, there will
still remain systemic inefficiency arising from a continuing need for the payment of informational
rents to the farmers participating in the scheme.
This paper presents the analysis of a model that focuses on the Principal- Agent
characteristics of this problem and sets out to investigate the tradeoffs that arise in designing
ecosystem procurement mechanisms where payment of informational rents to participants can be
used to increase overall efficiency. The impact of beneficial selection is carefully explored here, and
we suggest implications for policy makers and empirical propositions to be tested using a suitable
data set.