Managing natural-resource allocation and environmental externalities is a challenge. Institutional designs are central when improving water quality for downstream users, for instance, and when reallocating water quantities including for climate adaptation. Views differ on which institutions are best: states; markets; or informal institutions. For transfers of ecosystem services, we compare informal trust-based institutions to enforced contracts, both being institutional types we observe commonly in the field. The trust-based institutions lack binding promises, thus ecosystem-services suppliers are unsure about the compensation they will receive for transferring services to users. We employ decision experiments given the shortcomings of the alternative methods for empirical study of institutions, as well as the limits on theoretical prediction about behaviors under trust. In our bargaining game that decouples equity and efficiency, we find that enforced contracts increased efficiency as well as all measures of equity. This informs the design of institutions to manage transfers of ecosystem services, as equity in surplus sharing is important in of itself and in permitting efficient allocation.
We consider a case of water reallocation in Brazil, one which has numerous analogs elsewhere. To permit empirical study of the effects of institutions that can facilitate or restrict allocations, we conducted field experiments to explore trust’s potential when resource contracts are limited, using a novel asymmetric-productivity ultimatum game with a final surplus-sharing step added. As a form of informal institution, trust could in principle make rights and contracts unnecessary. We observe whether trust in compensation is in fact expected and expressed. We also explore whether trust is exploited, and the effect of communication, within our two bargaining structures: (1) no communication; and (2) with a non-binding message concerning the surplus to be shared. We see that our participants both expect and express trust that some of the surplus will be shared. Trust raises total output and some surplus is indeed shared: those who trust gain a bit on average; and the more trust was shown, the more was shared. However, often the trust was barely repaid. Further, the messages—found to help in other research—had little impact and were often untrue. In sum, trust does matter but both efficiency and equity could well rise with complete contracts.