Measuring transaction costs of grassland eco-compensation policies: the case of the Compensation and Rewards Policy for Grassland Protection in Inner Mongolia Autonomous Region

China is investing heavily in agri-environmental and eco-compensation schemes to address growing environmental problems in rural areas. However, assessments of the schemes often overlook transaction costs. Transaction costs are of particular importance in pastoral areas characterised by remoteness, dispersed populations, diverse agro-ecological conditions and heterogeneous livestock systems. Drawing on principles from institutional economics, this analysis investigated transaction costs associated with China’s current grassland eco-compensation schemes in Inner Mongolia and how they might change under alternative policy scenarios. The analysis examined the magnitude of overall transaction costs, their disaggregation among cost types and the incidence of the transaction costs at different administrative levels. The analysis found that the relative magnitude of transaction costs is substantial for the existing policy, whereas an alternative policy more effective in achieving stocking-rate reductions and improved grassland conditions increases transaction costs more than two-fold. The analysis demonstrated the value in accounting for transaction costs in the design and assessment of eco-compensation schemes.