The Impact of Fairness on Side Payments and Cost-Effectiveness in Agglomeration Payments for Biodiversity Conservation

•Fairness concerns affect the performance of agglomeration payment schemes.•If landowners have fairness concerns higher payments must be offered by the agency.•If landowners have fairness concerns cost-effectiveness of the scheme is reduced.•Fairness should gain more consideration in the analysis of environmental policies.

Agglomeration payment schemes aim at increasing the spatial connectivity of conserved land. Such payments are offered by a conservation agency to landowners subject to the condition that the conserved land is sufficiently connected to other conserved land. Facing this connectivity condition, landowners with conservation costs below the payment may need to offer some of their surplus through side payments to other landowners with high costs so that these conserve their land and the connectivity condition is met. Previous papers that modelled side payments in agglomeration payment schemes ignored that landowners may be sensitive to fairness and distributional issues. To incorporate fairness issues I relate a model of an agglomeration payment scheme to the well-known ultimatum game and show that if landowners are concerned about fairness and distribution the agency must offer higher payments and has to expect lower levels of cost-effectiveness.