The Boy who Cries Wolf: An Analysis of Ex-post and Ex-ante Compensation Schemes for Carnivore Predation on Sheep in Norway

Abstract

This master thesis compares the Norwegian model for compensation of sheep lost due to predation with the social planner optimum. The Norwegian model is based on the concept of compensating the observed damage caused by carnivores. I also analyze an alternative compensation scheme where the compensation is paid in advance. The results of the analysis shows that the usual compensation scheme removes farmers’ incentives to protect their herd. This do not occur in the alternative model. However it might be that this alternative model is difficult to use in Norway because of distribution and fairness. It is shown that the conservation agency can maintain protective effort through subsidies under the assumption that there are no moral hazard. But even with this correction, it seems like the Norwegian compensation scheme gives the sheep herders’ increased profitability, and thus their sheep stock is larger than what is considered social optimal. By a numerical example it is shown that the loss from the compensation scheme, when protective effort is not subsidized, is greater the greater the effect of the protective effort. Thus it seems like the present Norwegian compensation scheme is costly in terms of transaction costs, but that the alternative approach might not be a perfect solution either.