Principal-agent Relationships: A Note on Biomass Depletion

Abstract

Public authorities frequently mandate public or private agencies to manage their renewable natural resources. Contrary to the agency, which is an expert in renewable natural resource management, public authorities usually ignore the sustainable level of harvest. In this note, we first model the contractual relationship between a principal, who owns the renewable natural resource, and an agent, who holds private information on its sustainable level of harvest. We then look for the Pareto-optimal allocations. In the situation of an imperfect information setting, we find that the Pareto-optimal contracting depends on the probability that the harvesting level stands outside the sustainability interval. The information rent held by the agent turns out to be unavoidable, such that stepping outside the sustainability interval implies the possibility of depletion of the renewable natural resource. This, in turn, compromises the maintenance of the ecological balance in natural ecosystems.