Mitigating Risky Conservation Tenders: Can an Insurance Mechanism Be a Solution?

The cost of providing environmental goods and services by private landholders is often highly uncertain. However, standard bidding models for conservation tenders often ignore this uncertainty. As a result, they fail to suggest suitable mechanisms to reduce the negative impact of cost uncertainty. We contribute to this knowledge gap by developing an optimal bidding model for a risky and budget-constrained tender in the presence of an embedded insurance mechanism, offering income protection. Results from our analysis show that, relative to uninsured landholders, landholders paying an actuarially fair premium tendered lower bids, potentially improving the cost effectiveness of allocating conservation contracts.