Contractual difficulties in environmental management: The case of wetland mitigation banking

This paper offers a principal-agent model of private contracting in mitigation banking aimed at protection of wetland acreage and habitat, bio-diversity and physical functions of US wetlands. While it is straightforward to design an incentive contract, such a contract may be incapable of achieving the federally mandated objective of no net loss of wetland functions through wetland mitigation; there may be failure of contract design or execution. Also considered are several institutional mechanisms that may promote the convergence of private contracting and attainment mandated wetland protection. These include greater oversight by the government, payment of subsidies, greater accuracy in the identification of actual wetland quality by the principal, and use of several other incentive alignment mechanisms.