Conservation Payments under Risk: A Stochastic Dominance Approach

Conservation payments can be used to preserve forest and agroforest systems in developing countries. To explain landowners’ land-use decisions and determine the appropriate conservation payments, it is necessary to focus on risk associated with agricultural price and yield volatility. A theoretical framework is provided for assessing land-use allocation problems under risk and setting risk-efficient conservation payments when returns are not necessary normally distributed. Stochastic dominance rules are used to derive conditions for determining the conservation payments required to guarantee that the environmentally-preferred land use dominates, even when land uses are not considered to be mutually exclusive. An empirical application to shaded-coffee protection in the biologically important El Chocó region of West Ecuador shows that conservation payments required for preserving shaded-coffee areas are much higher than those calculated under the assumption of risk-neutrality. Further, the extant distribution of land has a strong impact on the required conservation payments.