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

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  • Adam Ozanne
  • Ben White

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.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Agricultural Economics.

Volume (Year): 58 (2007)
Issue (Month): 2 (06)
Pages: 260-268

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Handle: RePEc:bla:jageco:v:58:y:2007:i:2:p:260-268

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0021-857X

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Cited by:
  1. Latacz-Lohmann, Uwe & Schilizzi, Steven & Breustedt, Gunnar, 2011. "Auctioning Outcome-Based Conservation Contracts," 51st Annual Conference, Halle, Germany, September 28-30, 2011 114523, German Association of Agricultural Economists (GEWISOLA).
  2. Rob Fraser, 2012. "Moral Hazard, Targeting and Contract Duration in Agriā€Environmental Policy," Journal of Agricultural Economics, Wiley Blackwell, vol. 63(1), pages 56-64, 02.
  3. Peter Bardsley & Ingrid Burfurd, 2008. "Contract Design for Biodiversity Procurement," Department of Economics - Working Papers Series 1031, The University of Melbourne.
  4. Gorddard, Russell J. & Whitten, Stuart M. & Reeson, Andrew, 2008. "When should biodiversity tenders contract on outcomes?," 2008 Conference (52nd), February 5-8, 2008, Canberra, Australia 5979, Australian Agricultural and Resource Economics Society.
  5. Schilizzi, Steven & Breustedt, Gunnar & Latacz-Lohmann, Uwe, 2011. "Does tendering conservation contracts with performance payments generate additional benefits?," Working Papers 100883, University of Western Australia, School of Agricultural and Resource Economics.
  6. Wieck, Christine & Annen, Dominic N., 2012. "Participation, compliance and synergies at the farm level between the single payments scheme and farm certification labels," Discussion Papers 122123, University of Bonn, Institute for Food and Resource Economics.
  7. Ozanne, Adam & White, Benedict, 2008. "Hidden action, risk aversion and variable fines in agri-environmental schemes," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 52(2), June.

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