Contract Design for Afforestation Programs

Wanyi Dai Li, Nicole Immorlica, Brendan Lucier

Abstract: Trees on farms provide environmental benefits to society and improve agricultural productivity for farmers. We study incentive schemes for afforestation on farms through the lens of contract theory, designing conditional cash transfer schemes that encourage farmers to sustain tree growth. We capture the tree growth process as a Markov chain whose evolution is affected by the agent’s (farmer’s) choice of costly effort. The principal has imperfect information about the agent’s costs and chosen effort, and wants to find the minimal payments that maximize long-run tree survival. We derive the form of optimal contract structure and show how to calculate optimal payments in polynomial time. Notably, even when costs are time-invariant, the optimal contract can involve time-varying payments that are typically higher in earlier periods and may end early. We surveyed farmers partnered with an afforestation program in Uganda to collect data on tree maintenance costs and we derive the optimal payment contract for the reported costs.