1. Benefit Sharing Mechanisms for Genetic Biodiversity Conservation: a Multistage Game Between Local Owners and Multinational Companies Alessio D’Amato, Giacomo Pallante, Wenjuan Cheng University of Rome Tor Vergata ICABR 2015, June 16-19, Ravello, Italy

2. Outline ICABR 2015, Ravello D’Amato A., Pallante G., Wenjuan C. 2/20 i. Background and motivation ii. Research question iii. Conceptual framework iv. The model v. Results vi. Conclusions

3. Background - some facts ICABR 2015, Ravello D’Amato A., Pallante G., Wenjuan C. 3/20 Bioprospecting - Exploration of biodiversity for new genetic resources (GR) of social value (carried out by pharmaceutical, cosmetics, agricultural industries). Source: Artuso (2002) Agro-Biodiversity loss - Biodiversity is the source of bioprospecting. Need of sharing benefits of bioprospecting with who “conserve” the diversity. Since the beginning of the Green Revolution, the number of the worldwide consumed crop varieties have gradually decreased and, currently, only four crops provide 60 percent of human food energy (FAO, 2010).

4. Background – Access and conservation: the international regime ICABR 2015, Ravello D’Amato A., Pallante G., Wenjuan C. 4/20 Biodiversity lossR&D (bioprospecting) State sovereignty over tangible and intangible CBD, BG, Nagoya Tangible VS Intangible (plant) (knowledge) Property rights Intellectual property (patent) TRIPs Global legal protection (under NDUS) Access and Benefit Sharing Mechanisms and sui generis agreements

5. Background – agreements: some examples ICABR 2015, Ravello D’Amato A., Pallante G., Wenjuan C. 5/20

6. Background – local owners’ incentives ICABR 2015, Ravello D’Amato A., Pallante G., Wenjuan C. 6/20 Farmers in developing countries selected and cultivated for centuries an incredible mix or rare local landraces (Altieri, 1999). These are genetically variable and thus provides farmers with a differentiated and resilient crop portfolio against agricultural risks (Di Falco et al., 2010) The availability of attractive genetic traits, incentivizes bioprospecting multinational to use these genetic resources to develop new modern varieties, which being patented, are more genetically standardized (Koopman, 2005; Bellon, 2004). With the aim of increasing productivity, farmers adopt the new varieties on their land, thereby reducing the local agro-biodiversity (Weitzman 2000, Pascual and Perrings, 2007)

7. Background - Literature ICABR 2015, Ravello D’Amato A., Pallante G., Wenjuan C. 7/20 Feder (1980), define the base framework of the optimal land allocation under uncertainty on the performance of a new technology  Risk minimization VS Yield maximization. Goeschl and Swanson (2002), develop a model when the genetic resource is the essential input of the biotechnology sector. The industry underestimates the value of GR because is not taken into account the marginal benefits deriving from enlarging the set of conserved GR for still unknown future needs. Sarr et al. (2008) provide a review of how modelling the R&D option value of GR : the value depends on beliefs concerning the ability of current objectives to anticipate future risks and uncertainties. Markandya and Nunes (2010) analyse the optimal compensation that the bioprospecting multinational should pay to local community for accessing their GR.

8. Research question ICABR 2015, Ravello D’Amato A., Pallante G., Wenjuan C. 8/20 We add to previous researches by investigating the effect of two benefit sharing (monetary and technology transfer) mechanisms on the agricultural genetic conservation. The main contribution is analyzing the direct effect that the production and commercialization of the new product, based on local GR, has on the choice of land allocation by the local community, and indirectly, the impact on the loss of future benefits from potential further bioprospecting.

9. The Conceptual Framework – a graphical representation ICABR 2015, Ravello D’Amato A., Pallante G., Wenjuan C. 9/20 Local Owner F Multinational Sample of genetic resource Sample fee I (R&D) Global market L Market price F-L Share of benefits or technology transfer

10. The Conceptual Framework - the game ICABR 2015, Ravello D’Amato A., Pallante G., Wenjuan C. 10/20 Stage 0: Access to genetic resources Given the policy for accessing the genetic resources, the local owner decides if accept the policy rule. Stage 1: Investment and price The multinational decides the level of investments to obtain the new product and the related market price. The larger the investment, the higher the quality of the product as well as the global and local demand. Stage 2: Land allocation The local owner decides the amount of land to allocate to the new product observing the quality and the price and having expectations on its productivity. Stage 3: Option value The payoffs are observed. The multinational might adjust the choice in terms of price and investments by observing the local owner land allocation and the resultant reduction in future bioprospecting activities.

11. The Model – Free Access ICABR 2015, Ravello D’Amato A., Pallante G., Wenjuan C. 11/20

12. Results ICABR 2015, Ravello D’Amato A., Pallante G., Wenjuan C. 12/20 Last Stage Payoff realized Third Stage The local owner observes quality and prices and allocates land With and Second Stage The multinational anticipates land allocation and sets optimal quality and price

13. The Model – Benefit Sharing (monetary) ICABR 2015, Ravello D’Amato A., Pallante G., Wenjuan C. 13/20 A) Local Owner T =lump-sum transfer for access to genetic resources β = share of revenues (benefit sharing mechanisms) B) Multinational

14. Results ICABR 2015, Ravello D’Amato A., Pallante G., Wenjuan C. 14/20 Third Stage Second Stage

15. The Model – Technology transfer ICABR 2015, Ravello D’Amato A., Pallante G., Wenjuan C. 15/20 A) Local Owner ϕ = Technology transfer parameter (knowledge to use the new product) B) Multinational Results

16. Comparative static ICABR 2015, Ravello D’Amato A., Pallante G., Wenjuan C. 16/20 The effect of policies +-- --+

17. Results - discussion ICABR 2015, Ravello D’Amato A., Pallante G., Wenjuan C. 17/20 The increases of monetary benefit sharing produces a better GR conservation. The multinational compensates the higher costs with lower investments. This produces a decreases in current revenues that is compensated with an higher prices so as to keep the share of revenues non decreasing The variation of land allocated to new variety is negative since both price and investments disincentive the shift to the new variety. An higher transfer of technology pushes farmer to allocate more land on new variety. To counterbalance the loss of future revenues, the multinational decreases quality and compensates the loss of current demand by decreasing price (with no share of revenues). In this case the effect of price reduction is larger than the quality reduction and the final allocated land increases with the share of technology.

18. Results – Comparison between instruments ICABR 2015, Ravello D’Amato A., Pallante G., Wenjuan C. 18/20 Monetary Technology transfer Diversity conservation

19. Conclusions ICABR 2015, Ravello D’Amato A., Pallante G., Wenjuan C. 19/20 The multinational, when account properly for current and future bioprospecting activities, linked to unexploited genetic resources, moves strategically the price and quality of new product in order to incentivize the local owner decisions on agro-biodiversity conservation. The quality always decreases under the presence of policies. The introduction of a benefit sharing mechanisms, produces an higher conservation of biodiversity because the multinational reacts decreasing the investments thereby incentivizing the local owner to keeping cultivating the local GR. The transfer of technology is likely to constraint local owner in using the new variety, especially if combined with an increasing share of knowledge. In this case the policy can lead to less land for biodiversity because the multinational does not need to share profits with farmers and thus produces products at lower prices.

20. Further steps ICABR 2015, Ravello D’Amato A., Pallante G., Wenjuan C. 20/20 Introducing risk aversion in farmers current revenues through the decision on optimal agricultural inputs (farmers strategically would allocate land to obtain better quality?) Better characterization of option value terms for multinational and also local owners (function of previous investments?).

21. Thanks for your attention giacomo.pallante@uniroma2.it