Equivalence of Input Quotas and Input Charges under Asymmetric Information in Agri‐environmental Schemes

Abstract

A model of adverse selection and moral hazard in agri-environmental schemes is developed based on the input quota mechanism of Moxey et al. ( Journal of Agricultural Economics, Vol. 50, (1999) pp. 187-202) and Ozanne et al. ( European Review of Agricultural Economics, Vol. 28, (2001) pp. 329-347), rather than the input charge mechanism of White ( Journal of Agricultural Economics, Vol. 53, (2002) pp. 353-360), but the variable fine of the latter rather than the fixed fine assumed by Ozanne et al. ( European Journal of Agricultural Economics, Vol. 28, (2001) pp. 329-347) is used. Incentive-compatible contracts, including the optimal probabilities of detection (and, therefore, monitoring frequencies and costs) for more and less efficient farmers, are identified. It is shown that the input charge and input quota approaches lead to identical outcomes - in terms of abatement levels, compensation payments, monitoring costs and probabilities of detection - confirming the equivalence of input quotas and input charges under asymmetric information. It is also shown that the optimal contracts are independent of the risk preferences of farmers with regard to being caught cheating. Copyright 2007 Blackwell Publishing Ltd.

Use of Compliance Rewards in Agri‐environmental Schemes

“…(2001) that risk aversion among farmers can diminish the moral hazard problem under monitoring and output price uncertainty. Ozanne and White (2007), extending previous work by Moxey et al. (1999), Ozanne et al.…”

Incentive Contracts for Natura 2000 Implementation in Forest Areas

“…1 In our model, we consider that adverse selection is followed by moral hazard. In White (2002) and Ozanne and White (2007), even if the moral hazard problem arrives after the adverse selection problem, it differs from ours because induced by imperfect information about the agents' actual compliance to contractual measures. For Bontems and Thomas (2006), moral hazard comes from hidden action and takes place before the adverse selection problem, since effort (in fertilizer application) has an impact on soil productivity (private information of the farmer).…”

“…However, these studies generally involve either moral hazard or adverse selection separately. Analysing models that involve both moral hazard and adverse selection is more complicated, and articles developing such incentive-compatible contracts are rare and limited to agri-environmental policy (White 2002;Bontems and Thomas 2006;Ozanne and White 2007). 1 In our model, we consider that adverse selection is followed by moral hazard.…”

Analysis of policy instruments for control of nitrate pollution in irrigated agriculture in Castilla y León, Spain

“…Finally, it is worth mentioning that more accurate analysis are needed in order to take also into account monitoring and transaction costs and the existence of imperfect information (Kampas and White, 2004;Ozanne and White, 2007). All of them are key issues when these policy instruments are to be implemented in real agricultural systems.…”