Squeaky Wheel Gets the Oil: Incentives, Information and Drought Policy

Abstract

Most economic assessments conclude there is no economic efficiency case for governments to provide drought assistance. However, significant public funds are allocated to farmers during droughts and there is a second-best case to improve drought policy design. In this article we show that the National Drought Policy suffers from adverse selection, moral hazard, incentive compatibility and government commitment problems. We use ABARE farm-level data that suggest that at least adverse selection was a problem in Victoria during the 2002-03 drought. These results are replicated at the national level. The current approach of the Commonwealth and state governments is ineffective because it is very difficult to design an efficient and fair drought policy that relies on ex post revelation of information. An alternative approach is investigated where incentives are designed so that farmers self-select into one of a number of drought policy agreements consistent with their capacity to prepare for drought.

Cross-boundary and cross-level dynamics increase vulnerability to severe winter disasters (dzud) in Mongolia

“…Discourse about perverse incentives is not unique to Mongolia. Similar arguments have been made about the effects of misguided drought relief policies in the US (Coppock, 2011;Dunn et al, 2005), Australia (Botterill, 2003;Ha et al, 2007), and southern Africa (Vogel et al, 2010), including strikingly similar statements by Australian pastoralists about their colleagues who failed to prepare adequately for drought (Wahlquist, 2008). Further, the financial ''bailout'' approach of some government drought policies is thought to undermine efforts to promote more proactive drought planning and management (Vogel et al, 2010).…”

How drought affects the financial characteristics of Australian farm businesses

“…Due to the prevalence of drought in Australia, and the historical economic importance of agriculture to the Australian economy, drought policy has often been a policy focus for many state and federal governments (Wilhite 2003). Unsurprisingly, drought policy in Australia has also been a rich vein of scrutiny for economists (Freebairn 1983;Burdon 1995;Matthews et al 1997;Botterill 2003;O'Meagher 2005;Malcolm 2006;Ha et al 2007;Productivity Commission, 2009). Often economists have criticised drought policies that involve subsidies and grants, arguing that drought is just one of several business risks that farmers should accommodate.…”

Lessons from the Dzud

“…To avoid this dynamic, in some areas aid is distributed equally among all herders, resulting in too little assistance to make a meaningful impact. Similar concerns about perverse incentives are articulated in the literature on drought relief and drought policy in other semi-arid and arid pastoral regions including the Western US (Coppock 2011;Dunn, Smart, and Gates 2005), Australia (Botterill 2003;Ha et al 2007), and Southern Africa (Vogel, Koch, and Van Zyl 2010). In these contexts drought relief is seen to encourage livestock producers to hold their livestock rather than destocking, leading to overuse and further degradation of already stressed rangelands (Botterill 2003;Dunn, Smart, and Gates 2005;Ha et al 2007).…”