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Incentive Contract and Weather Risk

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  • Patrice Loisel
  • Bernard Elyakime

    ()

Abstract

We study contracts designed to remunerate a farmer for the production of an ecosystem service with the payment dependent on the results of the farmer’s actions and on weather conditions. Two contracts are proposed: the first takes into account both the results of the farmer’s actions and a weather variable that reflects the actual atmospheric conditions during the life of the contract; the second bases the payment on the results alone incorporating only the average effect of weather. Social welfare is optimal when both the results and the specific atmospheric conditions are taken into account; however, this type of contract may be less acceptable to the farmer due to his perception of the level of risk involved. Copyright Springer Science+Business Media, Inc. 2006

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File URL: http://hdl.handle.net/10.1007/s10640-006-9009-z
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Bibliographic Info

Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

Volume (Year): 35 (2006)
Issue (Month): 2 (October)
Pages: 99-108

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Handle: RePEc:kap:enreec:v:35:y:2006:i:2:p:99-108

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Web page: http://www.springerlink.com/link.asp?id=100263

Related research

Keywords: ecosystem service; incentive contract; moral hazard; risk; weather; D8; Q2;

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  1. Joseph C. Cooper, 2003. "A Joint Framework for Analysis of Agri-Environmental Payment Programs," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(4), pages 976-987.
  2. Jussi Lankoski & Markku Ollikainen, 2003. "Agri-environmental externalities: a framework for designing targeted policies," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 30(1), pages 51-75, March.
  3. Sanford Grossman & Oliver Hart, . "An Analysis of the Principal-Agent Problem," Rodney L. White Center for Financial Research Working Papers 15-80, Wharton School Rodney L. White Center for Financial Research.
  4. Peter Goldsmith & Rishi Basak, 2001. "Incentive Contracts and Environmental Performance Indicators," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 20(4), pages 259-279, December.
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