Investigating the role and scale of transactions costs of incentive-based programs for provision of environmental services in developing countries

The use of incentives for the provision of environmental services occupies a critically important place in the international development agenda. The use of local approaches for watershed services provision and international efforts for global provision of climate change land-based mitigation services are among promising management options. These two options have the potential to significantly reduce the overall costs of meeting environmental targets through market-based institutional arrangements. Despite widespread agreement that transaction costs are important, existing research has not yet considered the scale and role of transaction costs in determining: 1) the rate of adoption of incentive-based schemes for the provision of watershed services in the developing world, and 2) the supply of mitigation services associated with avoided emissions from deforestation, particularly in a developing country context. To address the former, the first chapter of this dissertation identifies patterns of adoption and the exogenous and endogenous factors that help to explain the number of incentive-based programs adopted during the last decade. Using an econometric model, it suggests that the degree of adoption can be interpreted as diffusion of interdependent induced institutional innovations. The second chapter presents a conceptual framework for transaction costs and reports results of field data collection and empirical estimates of the scale of transaction costs of mitigation through land-based activities in Ecuador taking place under alternative incentive-based institutional arrangements. The third chapter of this dissertation develops an econometric model to estimate the elasticity of land supply in Ecuador and evaluates the effect that transaction costs have on incentive-based mitigation activities. Knowledge generated from this research aims at enriching the scholarly debate on policy diffusion and climate change policy and provides critical insights for policymakers interested in incentive-based institutional arrangements for the provision of environmental services.