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CREED Paper #21: Institutional Arrangements for Watershed Management: A Case Study of Arenal, Costa Rica

Author(s)Bruce Aylward, Alvaro Fernández González
Serie(s)Creed Working Papers


The CREED Costa Rica project conducted an exhaustive quantitative inquiry into the economic factors that determine land use in Río Chiquito watershed of Lake Arenal, Costa Rica and found that livestock production is likely to produce positive hydrological externalities. This paper integrates these results into an application of the Institutional Analysis and Development Framework that is informed by a participatory process conducted with watershed stakeholders. The paper identifies physical measures, institutional arrangements and incentives mechanisms to stimulate improved watershed management in Río Chiquito by expanding the analysis beyond just the internalization of hydrological externalities, to consideration of the larger bundle of goods and services provided by the watershed. In so doing it provides a refined vision for the Action Program drafted by stakeholders. The latter is evaluated using IAD criteria and found to be a promising improvement over current arrangements.

Not surprisingly, the findings suggest that the public good characteristics of a number of the watershed goods and services produced in Río Chiquito imply the need for institutional arrangements beyond that represented by markets. Still, the results suggest that simply labeling such goods and services as public goods is too simplistic an approach. In the Arenal case, although upstream landholders may find it difficult to exclude others from consuming the downstream benefits of land use decisions already made, the possibility remains that they may retain rights of exclusion over future land use decisions. Given the private good characteristics of downstream hydrological products this suggests that there does exist a basis for a market-driven, polycentric arrangement between upstream producers and downstream consumers. Thus, the advantage of investigating the public good natures of the myriad of goods and services produced by watersheds is that it provides an analytical basis for the suggestions of the types of institutional arrangements that might be most appropriate for the management of these goods and services.

As an incentive mechanism for implementing a polycentric scheme to improve watershed management it is recommended that the interinstitutional commission, called for under the Action Program, develop a two-way sealed bid auction system of allocating contractual arrangements. Producers would agree to undertake management improvements in return for compensatory resource transfers (or projects). External stakeholders wishing to obtain off-site services would not only contribute funds but assist in establishing priorities for the awarding of contracts, up to and including establishing their willingness to pay for specific measures in specific geographic areas. Ideally, producers would likewise set their offer price for specific measures in specific geographic areas. The respective sealed bids would be sorted and matched in a cost-effective, optimizing manner by an independent committee organized under the commission. The hydrological and economic information developed in the CREED project could be used to establish both hydrological and carbon storage priorities, while the offer price for the measures would be best left to the individual producers to decide.


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