Coral reef conservation incentives and revenue sharing

Abstract

Coral reefs are at particular risk of overexploitation and extinction due to negative externalities from productive sectors such as tourism and fisheries. Increased reliance on tourism revenue means difficult trade-offs. This study proposes a community-based approach to conservation based on a bioeconomic model. We extend earlier work on exogenous reward-based conservation programs by specifying rewards contingent on the level of conservation effort. In addressing the question—whether effort-dependent revenue-sharing incentivizes local residents to engage in conservation activities—the findings indicate that what matters is the relative size of reward, the degree of reliance on coral reefs as a source of revenue, and how the stock is perceived by economic agents, that is, whether they view coral reefs as a commodity or a nuisance.

Keywords

bioeconomic community revenue sharing coral reefs ecotourism environment green tourism local economy management open access property rights renewable resources sustainable development

Introduction

Coral reefs and their ecosystems serve as valuable sources of food, income, employment, pharmaceutical research, tourism, and shoreline protection to a large number of coastal residents (Cinner et al., 2012, 2016; Havinga et al., 2020; Spalding et al., 2017; Teh et al., 2013). The fear, however, is that anthropogenic stress on coral reefs from pollution externalities will irreversibly harm the resource.¹ These negative externalities stem from productive sectors such as tourism and fishing (Burke et al., 2012; Eastwood et al., 2017; Halpern et al., 2015; Hilmi et al., 2017; Richmond et al., 2018). Marine researchers and conservationists argue that taking decisive action against local threats such as overfishing, erosion, and pollution to optimize coral reef resilience is imperative and also note the effects of climate change² (including ocean warming and altered cyclone and rainfall patterns) presenting further uncertainty to the analysis (ICRI, 2018).

Policy makers have considered various punitive conservation methods which entail adopting regulation and sanctioning measures (Nolan, 2017; Yoder, 2019); however, in this study, we propose an incentivized collaborative conservation approach and examine its impact on the sustainability of coral reefs. These incentivized conservation approaches which attempt to influence human behavior have been categorized in three ways: promoting awareness and concern, incentivizing action on the part of stakeholders, and nudging behavior (Reddy et al., 2016; Stern, 2017). There are several related studies in the literature including Gonzales et al. (2017) which examined cases of collaborative behavior to restore regional water supply; Tanaka (2019) used integrative management approaches to conserve Japan’s national parks; Fischer et al. (2011) and Graves (2018) utilized collaborative management schemes to conserve endangered wildlife; and Nyakaana et al. (2019 ) and Thing and Poudel (2017) used these integrative approaches to conserve tropical forests.

The commercial value of US fisheries from coral reefs is over US$100 million and US economies generate billions of dollars from reef tourists via diving tours, recreational fishing trips, hotels, and restaurants (NOAA, 2019). In Southeast Asia alone, coral reefs provide economic benefits in the region of US$1.6 billion to Indonesia and US$1.1 billion to the Philippines on an annual basis (Burke et al., 2012). Tourism and recreation contribute US$9.6 billion of the world’s coral reef net benefits and reef tourism provides economic benefits to at least 94 territories, 23 of which reef tourism accounts for over 15% of gross domestic product (Reytar et al., 2011).

It has been argued that up to 90% of all coral reefs could be lost by 2050 (ICRI, 2018). Reytar et al. (2011) present risk projections for coral reef cover in the Atlantic, Australia, Indian Ocean, Middle East, Pacific, and Southeast Asia regions and globally.³ In all regions, projected risk (at medium to critical levels) was over 80%. Marine researchers and environmental conservation advocates have been sounding the alarm for over two decades citing that “half of the world’s coral reefs may die within the next 40 years unless urgent measures are taken to protect them” (World Conservation Union, 2005: 13). Further, “24% of the world’s reefs are under imminent risk of collapse through human pressures, and a further 26% are under a longer-term threat of collapse” (Wilkinson, 2004: 21). These statements have drawn the attention of environmental interest groups and government officials in countries which harbor the reefs as they seek to implement policies to curtail this trend.

Figure 1.

Reefs at risk projections: Present, 2030, and 2050. Note. “Present” represents the Reefs at Risk integrated local threat index, without past thermal stress considered. Estimated threats in 2030 and 2050 use the present local threat index as a base and also include projections of future thermal stress and ocean acidification. The 2030 and 2050 projections assume that current local threats remain constant in the future and do not account for potential changes in human pressure, management, or policy, which could influence overall threat ratings. Source: World Resources Institute. Reefs at Risk Revisited, 2011

For coral reefs and the marine life for which they provide a habitat, conservation is critical, and this requires the engagement of stakeholders at the local, regional, and national levels. However, there is a delicate dance in the bioeconomic realm where the choreography entails embracing the positive externalities or benefits of coral reefs and reining in the negative externalities or exploitation of the resource. This is the classic “tragedy of the commons” concept put forth by prominent biology researcher, Garret Hardin. He summarized the idea as one where multiple rational parties,⁴ independently engaged in achieving their self-interested goals, ultimately deplete a limited common resource (Hardin, 1968).

Herein, the focus is on the alarming depletion of coral reefs stemming from the direct harvesting and trading of coral for sale in expanding aquarium markets (Armitage et al.,⁵ 2017; Donaghey,⁶ 2011; Morcom et al., 2018) as well as the negative externalities imposed by marine-based tourism activities. The expansion among aquarium markets is fueled by the poor long-term survival rate of coral in artificial conditions, so they must be frequently replaced.

Policy approaches⁷ adopted to conserve natural resources, designating protected areas to preserve biodiversity and to conserve the endangered natural resource, and thereby encouraging its resiliency, have been explored (Hilmi et al., 2017; Tanaka, 2019). Researchers argue that this “fences and fines” approach to conservation (particularly in developing countries with a history of colonialism) alienates local residents from the resource and undermines intrinsic interest in preserving the natural resource (Bluwstein and Lund, 2018; DeCaro and Stokes, 2008; Zanamwe et al., 2018). Instead, researchers have promoted natural resource management schemes that engage the cooperative efforts of local residents in conservation programs geared at creating a sustainable resource environment. Ostrom (1990) showed that the “tragedy of the commons” can be mitigated if users of the open-access resource cooperate with each other to monitor the sanctioned use of the resource. Formalized cooperative conservation approaches are also referred to as integrated conservation and development projects (ICDPs).⁸ The main goal of ICDPs is to encourage the simultaneous conservation of the natural resource and the economic development among local communities via benefits transfers (Heil, 2017; Nyakaana et al., 2019).

But ICDPs also have their limits based on the community response to benefits transfers. Ferraro (2001) and Brandon and Wells (1992) questioned whether local residents who initially relied on income sourced from activities that threatened the natural resource would regard the new sources of income (transfers) as complementary or substitutive. They observed that these transfers may not necessarily lead to voluntarily refrain from activities that undermine the resource. They concluded that incentives need to be in the form of direct measures, that is, payments based on conservation results. McGillivray (2011) highlights the importance of mitigation and compensation measures when pursuing sustainable development of natural resources. Further, the author recommended that policy makers move toward options which carefully balance property rights/development interests with conservation objectives. Consistent with this approach, this study examines conservation incentives among local coastal residents who receive a revenue-share contingent on their own conservation efforts.

In the second section, a bioeconomic model is developed which is aligned with resource conservation literature (e.g. DeCaro and Stokes, 2008), studies on open-access poaching of the African elephant (e.g. Horan and Bulte, 2004; Muchapondwa and Stage, 2015), and with East African wildlife conservation cases (e.g. Holden et al., 2018; Shulz and Skonhoft, 1996; Skonhoft, 1998). This model is adapted to case of the coral reef where resource rights are poorly defined, governance is ineffective, and threats to the resource are alarming. Fischer et al. (2011) examine the use of fixed revenue shares as conservation incentives; however, this study analyzes endogenous revenue-shares contingent on conservation effort levels among local residents. The implications for coral reef sustainability are considered in a simultaneous open-loop differential game framework. The third section examines interaction between a representative profit-maximizing marine agency and local residents. This study addresses whether effort-dependent revenue sharing provides steady-state equilibrium conservation incentives. The findings indicate that this depends on (i) the relative sizes of revenue shares retained by the local residents and the marine agency, (ii) the rule used to award revenue shares, (iii) the sign and size of in situ and ex situ stock net marginal benefits, and (iv) how the stock is perceived by the economic agents—is the stock a commodity or a nuisance?⁹

Model

A biological and economic framework is developed for the open-access resource case where the setting is a coastal territory which hosts a stock of coral reef, R. The interaction among three major stakeholders is studied in this bioeconomic model: a profit-maximizing marine agency, local residents, and coral reef poachers.¹⁰ Two control variables are used: coral harvesting permits (y) and local residents’ conservation effort (E). The marine agency is a profit-maximizing entity which generates economic rents from coral harvesting permit sales to commercial interests linked to aquarium, jewelry, and curio markets, as well economic rents from benign¹¹ tourism. Given that the sustainability of the coral reef stock is central to the profitability objective of the marine agency, there is an incentive on its part to distribute some of these earnings to the local community to get them on board with coral reef conservation. The in situ coral reef biomass evolves according to¹²

\overset{•}{R} = G (R) - y - z,

where $G (R)$ is the biological growth function, y is the coral harvesting permits set by the marine agency based on the available stock of coral reef, and z refers to coral offtake by coral reef poachers for sale in overseas markets. To gain further insight, explicit functional forms¹³ are used to describe the components of the equation of motion for the stock,

G (R; g, K) = g R 〈1 - R / K〉,

y = Q (R; q, L_{q}) = q R L_{q},

z = χ (R, E; x, L_{x}, ψ_{x}) = x R L_{x} - ψ_{x} E .

The stock’s growth equation is given in equation (2) where K is the carrying capacity and g is the intrinsic growth rate. In equation (3), the Schaefer (1954) harvesting function is used to describe coral extraction by the permit holders, where q is the marginal harvesting rate of permit holders, and L_q the number of authorized extractors.¹⁴ Finally, coral reef harvesting by poachers is shown in equation (4), where $x > 0$ is the marginal extraction rate of poachers and $L_{χ} > 0$ , the poacher population¹⁵ at any given time. The following properties hold for the poaching function: $χ' (R) = x L_{x} > 0$ ; $χ' (E) = - ψ < 0$ . The parameter, ψ, captures the marginal reduction rate of coral reef depletion attributed to conservation effort from local residents.¹⁶

Local residents are motivated by the prospect of an increased revenue share fueled by their conservation efforts. A revenue-sharing model is developed in which the marine agency provides conservation incentives to local residents by awarding them a portion, $0 \leq α \leq 1$ , of its permit sales revenue and a share, $0 \leq β \leq 1$ , of its benign tourism revenue. The Skonhoft (1998) model is extended by relaxing the parametric assumption on α; rather welfare implications are considered when the revenue share is contingent on the conservation effort by local residents. The model assumes that the residual revenue is retained by the marine agency and an interesting element of this revenue-sharing discussion is how the relative sizes of these revenue shares impact the conservation incentives among local residents. The agenda of the main agents¹⁷ will now be described, and their best response functions developed for the game which ensues between them.

Local residents

Conservation effort by local residents refers to a variety of measures used to reduce coral poaching including site policing and reporting accounts of destructive behavior by coral poachers to the marine agency.¹⁸ In studies which examine poaching behavior as it relates to wildlife and other endangered species, it is noteworthy that much of the poaching behavior can stem from the local residents themselves as they seek to generate black market economic rents. Their poaching involvement may even be incentivized by their desire to eliminate pesky wildlife which may be nuisances in their agricultural fields. However, in this analysis, the simplifying assumption is one where the majority of local residents are wholly invested in conserving the coral reef as its sustainability is critical to other key revenue-generating industries such as marine-based tourism and fishing. The focus is on the conservation effort solely by local residents, ignoring the possibility of the marine agency engaging in additional conservation behavior. Conservation costs incurred by local residents are assumed linear in effort, $C (E) = c E$ , where $c > 0$ is the marginal cost of effort. Costs include the economic value of time, labor, and other factors of production redirected from other productive activities. Given nonnegative conservation effort,¹⁹ the following implicit cost assumptions hold: $E = 0$ $\Rightarrow$ $C (0) = 0$ , $C' (0) = 0$ ; $E > 0$ $\Rightarrow$ $C' (E) > 0$ , $C'' (E) = 0$ . Local residents are assumed to maximize the present value of the stream of their collective rents where r represents their discount rate. Local residents derive utility from three sources:(i) an income source, M, which is independent of the coral stock or conservation effort,²⁰ (ii) revenue shares from benign tourism revenue, and (iii) shares of permit sales awarded by the marine agency. Total benign tourism revenue is a function of per unit revenue, $τ > 0$ and the reef stock.²¹ The functional specification²² $α = η ln (E)$ is used, where η is revenue share per log unit of conservation effort exerted.²³ The local residents’ total net utility function is given by

U (E, R) = M + β τ R + α p y - c E,

where $U' (E) > 0$ and $U " (E) < 0$ ; $R (0) = R_{0}$ ; $E \geq 0$ . The market price of harvesting permits is fixed at p. The price-taking assumption is motivated by the competitive nature of coral tourism—several tropical countries supply coral permits in this growing trade.²⁴

First-order conditions for the local community yield the optimal effort level, E*,

E^{*} = \frac{η p y}{c - λ^{*} ψ} .

The model finds that optimal effort level, E*, among local community members occurs when marginal benefits of conservation equal its marginal cost. Marginal benefits comprise two parts: (i) marginal revenue received by the local residents in the form of the revenue share awarded by the marine agency, and (ii) the imputed shadow value²⁵ of net increase in coral stock as a result of increased conservation effort.

Theoretically, conservation effort among local residents could be positive, negative, or undefined depending on the relative size of the marginal cost of conservation effort and the shadow value of the net increase in stock attributed to conservation effort as shown in equation (6) and λ is the costate variable. Negative effort translates to the local residents collaborating with the coral reef poachers.²⁶ The model abstracts from the possibility of negative conservation effort (collaboration to deplete the resource) by making two assumptions: (i) local residents are not negatively affected by the in situ coral reef stock, and (ii) local residents do not receive rents from the poachers as payment for collaboration effort to destroy to the coral reef stock; hence, there is no incentive for the local residents to engage in this activity.

Further, the result in equation (6) shows that positive conservation effort implies the condition $c > λ ψ$ necessarily holds. This means if the marginal cost of conservation effort exceeds the perceived intrinsic marginal benefits the local residents derive from reducing coral poaching, then they will engage in conservation activities only when they can expect direct revenue-sharing benefits which are used to subsidize the cost of their effort.

Interior steady states require²⁷ $\overset{•}{R} = \overset{•}{λ} = 0$ , and the steady-state shadow value of the stock is

λ^{*} = \frac{α p q L_{q} + β τ}{〈r - (g - 2 g R / K) + q L_{q} + x L_{x}〉} .

Given the marginal rents from harvesting permit sales and from benign tourism awarded to local residents are positive, the local residents perceive the coral reef as a commodity if their discount rate, r, exceeds the marginal net growth²⁸ (MNG) in the stock and as a nuisance otherwise.

Further insight is gained by examining the dynamics of the coral reef stock presented in Figure 2 as impacted by the conservation efforts of local residents.

Figure 2.

Steady-state stock levels and conservation.

The combined harvest from permits and coral poachers is mapped against the growth function of the stock for a given level of conservation effort. Two steady states are shown in Figure 2. R_a is the level of stock where no conservation is taking place, and R_b reflects the case where positive conservation effort is in effect such that E > 0 and R_b > R_a .The stability of the local residents’ optimization model is examined using the differential equation system: $\overset{•}{E}$ , $\overset{•}{R}$ , and $\overset{•}{λ}$ and is depicted in Figure 3.

Figure 3.

Local residents’ stability analysis—Phase diagram in state-control space.

There are at least four stable branches in the system. Local residents move to the steady state, e, by getting on to one of these trajectories. Given an initial value of the stock R₀, local residents must choose an initial level of conservation effort E₀, such that the ordered pair $〈R_{0}, E_{0}〉$ lies on a stable branch. An undesirable scenario is one characterized by ever-decreasing coral reef stock and ever-decreasing effort, which then results in ever-increasing poaching, and the eventual extinction of the stock. A similar prospect of multiple trajectories is highlighted in Horan and Bulte (2004) where the contrast was made between short-term and long-term incentives and the impact on conservation efforts regarding wildlife. In the short term, externally sourced incentives ensured that the system proceeded to a path of abundant resource stock but ran the risk of defaulting to a trajectory characterized by a low abundance steady state if no incentives were put in place. In the longer horizon, it was found that optimal conservation efforts are contingent on the commitment of local communities fueled the creation of incentives for themselves. In this study, the endogenously determined revenue share and fixed tourism revenue share guides the conservation effort strategy of the local residents.

The profit-maximizing marine agency

The marine agency derives economic rents from permit sales and benign tourism sales of which it retains shares, $(1 - α)$ and $(1 - β)$ . Its costs comprise physical operational expenses, and these constant costs²⁹ are represented as $c_{A} > 0$ . The agency maximizes profits over time,³⁰ subject to the dynamics of the coral stock in equation (1), with its choice of y.

The objective function of the marine agency, where $R (0) = R_{0}$ ; $y \geq 0$ , is represented as

Π (y, R) = (1 - β) τ R + (1 - α) p y - c_{A} .

The marine agency will then choose to issue coral harvesting permits given by

y = \frac{p (1 - α)}{ω^{*}},

where ω is the costate variable. This result suggests that the optimal number of permits occurs where the net marginal benefit from permit sales equals the shadow value of the stock. Given constant costs, net marginal benefit from permit sales amounts to the retained marginal permit sales revenue and the marine agency’s shadow value of the coral reef stock is

ω^{*} = \frac{(1 - α) p q L_{q} + (1 - β) τ}{〈r_{A} - (g - 2 g R / K) + q L_{q} + x L_{x}〉} .

Analogous to the analysis of local residents’ behavior based on equation (7), how the marine agency perceives the stock of coral reef (commodity vs. nuisance) is a function of the relative sizes of its discount rate, r_A, and the coral reef’s MNG. As coral reefs are its only source of economic rents, the model assumes the profit-maximizing marine agency perceives the coral stock as a commodity.³¹

The differential equation system: $\overset{•}{y}$ , $\overset{•}{R}$ , and $\overset{•}{ω}$ reveals stability properties of the marine agency’s optimization model. The phase diagram³² of the system is presented in Figure 4, and the dynamics reveal two possible steady-state equilibria, e₁ and e₂, but only one is stable.

Figure 4.

Marine agency’s stability analysis—Phase diagram in state-control space.

Equilibrium e₁ is characterized by high harvesting effort, low stock, and high search costs, whereas e₂ corresponds to low harvesting effort, high stock, and low search costs. The sustainable harvests are the same at these two equilibria, but the marine agency would gravitate toward e₂. Further, the marine agency is unable to identify a stable branch which leads to e₁. There is only one way the economy can move toward e_2. It needs to get on to the unique branch—the “yellow brick road”³³ highlighted in Figure 4. Given an initial value of the stock R₀, the marine agency must choose a number of permits y₀, such that the ordered pair $〈R_{0}, y_{0}〉$ lies on a stable branch. An undesirable scenario is one characterized by ever-decreasing coral reef stock and ever-increasing permits, which results in the eventual extinction of the stock.

Agent interaction and conservation incentives

The local residents and the marine agency select their strategy sets $E^{*}$ and $y^{*}$ simultaneously.³⁴ They each believe they cannot affect the other’s control path on the margin such that³⁵ $\frac{\partial y}{\partial E} = \frac{\partial y}{\partial R} = 0$ and $\frac{\partial E}{\partial y} = \frac{\partial E}{\partial R} = 0$ . From equations (6) and (9), an open-loop Markovian Nash (OLMN) equilibrium, $〈E_{m}^{*}, y_{m}^{*}〉$ , is derived where these strategies are the solutions to

E_{m}^{*} = \frac{(1 - η ln (E_{m}^{*})) p}{(1 - β) τ} 〈\frac{η p Φ_{}}{c - λ^{*} ψ}〉,

y_{m}^{*} = \frac{p 〈1 - η ln 〈\frac{η p y_{m}^{*}}{c - λ^{*} ψ}〉〉 Φ_{A}}{(1 - β) τ} .

An OLMN equilibrium exists if and only if $Φ = 〈r - (g - 2 g R / K) + q L_{q} + x L_{x}〉 > 0$ and $Φ_{A} = 〈r_{A} - (g - 2 g R / K) + q L_{q} + x L_{x}〉 > 0$ . As such, both the local residents and the marine agency must regard the stock as a commodity rather than a nuisance. This is a rational expectation for the marine agency, as they derive their economic rents solely from the stock of coral reef. This result also reiterates the necessary core assumption that local residents view the coral stock as a commodity or at least they should not perceive it as a nuisance.³⁶

As shown in Figure 5, given the effort-dependent revenue share, equilibrium conservation is given by

E_{m}^{*} = 〈\frac{η p Φ_{}}{c - λ^{*} ψ}〉 \frac{(1 - α_{m}^{*}) p}{(1 - β) τ} .

Figure 5.

Reaction functions under simultaneous play and the OLMN equilibrium. OLMN: open-loop Markovian Nash.

By definition, the equilibrium revenue share, $α_{m}^{*}$ , is jointly determined by the utility and profit-maximizing objectives of each player. Firstly, equilibrium conservation effort is a function of the local residents’ positive marginal tourism benefits (captured in $λ^{*}$ ) as well as the marginal benefits they derive from the permit revenue share. The results find the marine agency’s relative preference for permit revenue over rents from tourism reinforces the incentive for equilibrium conservation effort. The equilibrium number of coral reef harvesting permits in equation (12) is characterized by positive marginal tourism benefits retained by marine agency and the relative preference for permit revenue shares over tourism rents.

This brings us to the main question—does effort-dependent revenue sharing encourage increased conservation in a steady-state equilibrium? This question is addressed by examining the impact of the dependence parameter, η, on equilibrium effort and permits.³⁷ An a priori assumption may be that increasing the dependence of the residents’ revenue share on their level of conservation effort would lead to monotonic increases in their equilibrium conservation effort. While the study finds a monotonic decrease in the equilibrium permits set by the marine agency as residents receive increased revenue shares, the results show that changes to the equilibrium conservation effort are nonmonotonic resulting in nonmonotonic changes to the OLMN equilibrium.

Figure 6.

Reaction function shocks attributed to changes in η.

Figure 7.

OLMN equilibrium shocks attributed to changes in η. OLMN: open-loop Markovian Nash.

There is a threshold beyond which increasing the dependence of the revenue share on conservation effort leads to an overall decrease in the equilibrium level of conservation effort. This threshold is identified by examining the relationships

\frac{\partial E_{m}^{*}}{\partial η} = \frac{p^{2} Φ_{} (1 - 2 η ln (E_{m}^{*}))}{(1 - β) τ (c - λ^{*} ψ) + (η^{2} p^{2} Φ / E_{m}^{*})} \frac{>}{<} 0,

\frac{\partial y_{m}^{*}}{\partial η} = \frac{- ln 〈\frac{η p y_{m}^{*}}{c - λ^{*} ψ}〉 p Φ_{}}{〈(1 - β) τ + \frac{η p Φ_{}}{y_{m}^{*}}〉} < 0.

Given the dynamics in equation (14), equilibrium conservation effort is increasing in η if $E_{m}^{*} < exp (1 / 2 η)$ . A numerical analysis showing changes in equilibrium effort levels is summarized in Table 1, and the impact of effort-dependent revenue sharing on the OLMN equilibrium is summarized in Table 2. The study finds for some value of η in the range $0.75 < η < 1$ , equilibrium conservation effort is independent of η.

Table 1.

Equilibrium conservation effort and effort-dependent revenue sharing.

η	Equilibrium effort	EXP(1/2η)	Equilibrium effort − EXP(1/2η)	$\frac{\partial E_{m}^{*}}{\partial η}$
0.25	1.25	7.3891	−6.1391
0.50	1.95	2.7183	−0.7683	+
0.75	1.97	1.9477	0.0223	+
1.00	1.90	1.6487	0.2513	−
1.25	1.83	1.4918	0.3382	−
1.50	1.75	1.3956	0.3544	−
1.75	1.70	1.3307	0.3693	−
2.00	1.60	1.2840	0.3160	−

Table 2.

Impact of effort-dependent revenue sharing on the OLMN equilibrium.

	Comparative analysis	Numerical/Graphical analysis
Equilibrium conservation effort:	$\partial E_{m}^{*} / \partial η$ (+/−)	Nonmonotonic
Equilibrium permits:	$\partial y_{m}^{*} / \partial η$ (−)	Monotonically decreasing
OLMN equilibrium:	(+/−)	Nonmonotonic

Note: OLMN: open-loop Markovian Nash.

In equilibrium, the residents’ revenue share, $α_{m}^{*} = η ln (E_{m}^{*})$ , allows a simplification of $E_{m}^{*} < exp (1 / 2 η)$ to $α_{m}^{*} < 1 / 2$ or alternatively $(1 - α_{m}^{*}) > 1 / 2$ . From this condition, if at the outset, $α_{m}^{*} < 1 / 2$ , increasing the weight of conservation effort in revenue-share determination will lead to increased conservation engagement among local residents. The potential rise in residents’ conservation efforts may be attributed to their desire to increase their revenue share and not the explicit intent to reduce coral poaching. When $α_{m}^{*} > 1 / 2$ , the marine agency’s preference for permit sales declines. It relies more on benign tourism as a source of economic rents and equilibrium conservation engagement declines. Both local residents and the marine agency influence the equilibrium revenue share. With simultaneous interaction, neither player can sustainably influence $α_{m}^{*}$ to his benefit. The findings indicate that increasing η—the degree of dependence of the local residents’ revenue share on their effort—has an impact on conservation effort only when it serves to restore the economy to the stable OLMN equilibrium where $α_{m}^{*} = 1 / 2$ .

Ecotourism welfare implications and summary

Having considered the impact of revenue sharing between the marine agency and local residents arising from coral reef harvesting permit sales, the impact of revenue sharing in benign tourism revenue on the OLMN pair of strategies³⁸ is now examined. The results are shown in the comparative analyses in equations (16) and (17):

\frac{\partial E_{m}^{*}}{\partial β} = \frac{- η p^{2} Φ_{} (1 - α_{m}^{*}) 〈\partial Λ / \partial β〉}{Λ^{2}} > 0,

where $Λ = (c - λ^{*} ψ) (1 - β) τ$ ; and $\partial Λ / \partial β = - (1 - β) \frac{τ^{2} ψ}{Φ} - τ (c - λ^{*} ψ) < 0$

\frac{\partial y_{m}^{*}}{\partial (1 - β)} = \frac{- p^{2} Φ_{} (1 - α_{m}^{*})}{{〈(1 - β) τ〉}^{2}} < 0.

Figure 8.

Reaction function shocks attributed to changes.

Figure 9.

OLMN equilibrium shocks attributed to changes in β. OLMN: open-loop Markovian Nash.

The results show that increases in the fixed tourism revenue share lead to unambiguous increases in equilibrium conservation effort among local residents. Based on the comparative analysis in equation (17), the study finds $\frac{\partial y_{m}^{*}}{\partial β} > 0$ . This suggests as the retained tourism revenue share, $(1 - β)$ , increases, the marine agency’s relative preference for benign tourism rents increases on the margin, permit “production” declines, and fewer permits are issued in equilibrium. The impact of fixed revenue sharing on the OLMN equilibrium is summarized in Table 3.

Table 3.

Impact of fixed revenue sharing on the OLMN equilibrium.

	Comparative analysis	Numerical/Graphical analysis
Equilibrium conservation effort:	$\partial E_{m}^{*} / \partial β$ (+)	Monotonically increasing
Equilibrium permits:	$\partial y_{m}^{*} / \partial β$ (+)	Monotonically increasing
OLMN equilibrium:	(+)	Monotonically increasing

Note: OLMN: open-loop Markovian Nash.

A few different cases can also be considered along with welfare implications when the marine agency adopts extreme positions with respect to the revenues retained in the revenue-sharing program. When the revenue-maximizing marine agency retains all of the revenue from permit sales and benign tourism, when $α = 0$ and $β = 0$ . The local residents are strictly worse off, as they would receive no revenue shares while incurring the cost of conservation effort.

In a different extreme scenario, if the local community were to be awarded all revenue from the sale of coral reef harvesting permits and none of the tourism revenues $β = 0$ , the marine agency would not be inclined to issue any permits and generate all economic rents from tourism. This would make the local residents strictly worse off ultimately receiving no economic rents from permit sales nor tourism.

Overall, the pre-revenue sharing and pre-conservation welfare level of the local residents’ is maintained or raised if the revenue share received by the marine agency at least offsets the cost of conservation effort. The welfare of the marine agency varies directly with the size of the retained revenue shares. In isolation, the marine agency seeks to retain the highest possible share of revenues from permit sales and tourism; however, equilibrium requires the marine agency’s behavior is bound by its net impact on the local residents’ welfare.

OLMN equilibrium and implications for the coral reef stock

The separate effects of effort-dependent revenue sharing and fixed revenue sharing on equilibrium conservation effort among local residents and on equilibrium harvesting permits issued by the marine agency have been examined. Now, the overall impact of the interaction between the two players on the stock is determined. The OLMN steady-state stock, $R_{m}^{*}$ , is the level of stock when $\overset{•}{R} = 0$ , such that $R_{m}^{*}$ is the unique solution to

g R_{m}^{*} (1 - R_{m}^{*} / K) - y_{m}^{*} (R^{*}) - (R_{m}^{*} x L_{x} - ψ E_{m}^{*}) = 0.

From equations (7) and (10), the discount rates of the residents and agency based on the shadow values of the stock can be restated

\begin{array}{l} r = \frac{α p q L_{q} + β τ}{λ^{*}} + 〈(g - 2 g R_{m}^{*} / K) - q L_{q} - x L_{x}〉; \\ r_{A} = \frac{(1 - α) p q L_{q} + (1 - β) τ}{ω^{*}} + 〈(g - 2 g R_{m}^{*} / K) - q L_{q} - x L_{x}〉 . \end{array}

In the OLMN equilibrium, the MNG in the stock is given by $(g - 2 g R / K) - q L_{q} - x L_{x}$ . Aligned with Horan and Bulte (2004),³⁹ the discount rates for each agent can be thought of as the adjusted rate of return for holding the stock in situ. The MNG is the base rate of return for holding the stock in situ, and $〈(α p q L_{q} + β τ) / λ^{*}〉$ and $〈[(1 - α) p q L_{q} + (1 - β) τ] / ω^{*}〉$ are the adjustment factors for the local residents and marine agency. Each player’s adjustment factor is a direct function of their marginal benefits from benign tourism and permits; higher adjustment factors correspond to higher equilibrium stock levels and vice versa.

Finally, the impact of increased equilibrium conservation effort on the stock in the steady state by revisiting the steady-state condition is determined in equation (18). Totally differentiating equation (18)

d R / d E_{m}^{*} = \frac{- ψ}{- [(g R - 2 g R / K) - q L_{q} - x L_{x}]} > 0.

The result in equation (20) shows the response of the stock’s equation of motion to exogenous shocks to stock or equivalently, $\partial \overset{•}{R} / \partial R$ . For a given level of conservation effort, if the coral stock is shocked upwards, steady-state stability requires the stock to return to its steady-state level and not continue growing away from the steady state. We find $\partial \overset{•}{R} / \partial R < 0$ . In addition, higher equilibrium conservation effort ultimately leads to higher coral reef stock in the steady state. The findings in this study present an interesting, less explored perspective in the natural resource conservation literature. Usually, harvesting effort (e.g. Horan and Bulte, 2004; Skonhoft, 1998) and its impact on the resource stock is examined; however, in this study, the aspect of conservation effort is analyzed. The results show that, consistent with market models, anticipated benefits and costs drive the conservation decision (Davis et al., 2015; Gelcich and Dolan, 2015) where incentivized conservation led to increased density, biomass, and diversity of the resource stock. The findings in this study support the argument that strong conservation policy will be adopted more frequently and efficiently if there are economic and political reforms that create varied incentives to invest in conservation (Wright et al., 2015)

Conclusion

In this study, coral conservation incentives were examined via a revenue-sharing system between a profit-maximizing marine agency and an otherwise disengaged local community. The goal of the study was to determine whether effort-dependent revenue shares, that is, a commission-based approach, provided steady-state equilibrium conservation incentives within the local community. The analysis demonstrated that revenue sharing in and of itself does not automatically incentivize local residents to engage in conservation effort. The results show that a nonmonotonic conservation–reward relationship exists when the revenue shares from permit sales are contingent on effort. The study found that conservation behavior is influenced primarily by the relative size of the revenue shares and whether the local community perceives the stock as a commodity or nuisance.

This suggests more information should be provided to local communities on the intrinsic importance of the coral reef, and its vital role within the marine ecosystem. In addition to the commission incentive, once these communities recognize the intrinsic value of the resource, they would be more inclined to engage in conservation programs. But this does not occur in isolation, the results indicate that awarding a share of the rents from permit sales to local residents has an impact on the behavior of the marine agency as well. Although the marine agency may be incentivized to improve the quality of the coral reef stock and permit prices, the incentive to increase the overall stock of coral reef will depend on how much of the profits are retained by the agency.

The analysis of the rents from benign tourism reveal that conservation incentives among local residents depend on the reaction of the marine agency. The study finds that increases in the fixed tourism revenue share lead to unambiguous increases in equilibrium conservation effort among local residents. However, as the retained tourism revenue share, $(1 - β)$ , decreases for the marine agency, its relative preference for benign tourism rents decreases on the margin, and coral reef harvesting permit sales increase.

It is also important to acknowledge the role and importance of well-functioning institutions to effectively set coral reef harvesting permits and to create an adequate level of trust between local residents and the marine agency, so as to encourage transparency in their interaction, mitigate the effects of coral reef poaching, and to enhance conservation incentives among local residents for the long-term sustainability of the coral reef.

An objective assessment of this study would reveal a few limitations stemming from inherent simplifying assumptions associated with the foundational modeling. Although, the use of explicit functional form equations facilitates increased clarity of results, the generality trade-off is noted. Further, in this model, revenue-sharing conservation incentives on the part of the marine agency were driven by a profit motive. It would be useful to examine an alternative scenario where conservation incentives were governed by ecological sustainability rules ensuring that coral reefs levels were maintained above a designated threshold. This approach would be more aligned with a societal welfare maximization, rather than profit, objective.

A final important note relates to inherent concerns associated with the concept of incentivizing behavior. The nature and quality of the relationship between those initiating revenue-sharing schemes (marine agency) and the target conservation practitioners (local residents) are the powerful drivers of desired outcomes or otherwise. The assumption made in this study is that the marine agency has factored into the revenue-sharing approach the relevant norms, values, and other intrinsic elements that are critical for inducing desired behaviors. We recognize that the prospect of being rewarded via revenue sharing is only one part of the relationship between the marine agency and the local residents. Two-way credibility, trust, effective monitoring, and feedback loops are also important components. Therefore, this study acknowledges that any prescribed conservation plan will inevitably be incomplete if not complemented by significant strides in relationship building. The goal is to develop lasting conservation approaches that will likely be resilient within evolving political, socioeconomic, and ecological environments.

Footnotes

Acknowledgments

The author wishes to thank Jason F Shogren for his wisdom, expertise, and immensely valuable contributions to this study. In addition, thanks to colleagues including Anita Chaudhry and Erdal Kara for their valuable comments during preliminary discussions.

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

ORCID iD

Tesa E Leonce

Notes

Author biography

Tesa E Leonce earned her PhD from the University of Wyoming. Currently, she is an associate professor of economics at Columbus State University. Major areas of specialization are natural resource conservation and management with a focus on coral reefs and ecotourism. Other diverse interests include quality assurance, income inequality, and the economics of education.

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