On the efficiency of the mitigation hierarchy

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This article focuses on the avoid, reduce, compensate (ARC) sequence that accompanies the no net loss policy. It studies the behavior of a developer in the face of this policy. Under perfect information, it appears that this policy is a policy of environmental standards, whose objectives are difficult to transpose into a microeconomic decision model. Moreover, we show that the demand for compensation does not depend on its price. We then assume that the regulator does not share the same information as the developer on the environmental damage of the project. In this case, the developer strategically uses this asymmetric information. Using the backward induction reasoning, he simultaneously defines his demand for offsets and the level of environmental damage reduction based on the offset price. In the end, the project choice is made by also taking into account the price of the offset. This article shows that the mitigation hierarchy is ineffective under asymmetric information, making the safeguarding of biodiversity inefficient.