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Using Principal-Agent Theory to Deal with Output Slippage in the European Union Set-Aside Policy

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  • Fraser, Rob W.

Abstract

This paper proposes modifications to the existing EU set-aside policy which are designed to alleviate the problem of output slippage associated with heterogeneous land quality by using "incentive-compatible" mechanisms drawn from principal-agent theory. Specifically, it is suggested that there should be differential reference yields based on land quality to discourage the "adverse selection" of lower quality land for set-aside, and that the scope of set-aside monitoring should be expanded to include both the quantity and the quality of land set-aside so as to discourage "moral hazard" problems. The potential of these modifications is illustrated using a numerical analysis, which is also used to evaluate the role of a range of factors which determine the set-aside decision. Finally, an estimate of the "benefits" from reducing slippage required to justify the costs of including these modifications is provided.

Suggested Citation

  • Fraser, Rob W., 2001. "Using Principal-Agent Theory to Deal with Output Slippage in the European Union Set-Aside Policy," 2001 Conference (45th), January 23-25, 2001, Adelaide, Australia 125632, Australian Agricultural and Resource Economics Society.
    • Handle: RePEc:ags:aare01:125632
    DOI: 10.22004/ag.econ.125632
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    References listed on IDEAS

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    1. Bourgeon, Jean-Marc & Jayet, Pierre-Alain & Picard, Pierre, 1995. "An incentive approach to land set-aside programs," European Economic Review, Elsevier, vol. 39(8), pages 1487-1509, October.
    2. Hild Rygnestad & Rob Fraser, 1996. "Land Heterogeneity And The Effectiveness Of Cap Set‐Aside," Journal of Agricultural Economics, Wiley Blackwell, vol. 47(1‐4), pages 255-260, January.
    3. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
    4. Rob Fraser, 2000. "Risk and Producer Compensation in the Agenda 2000 Cereal Reforms: A Note," Journal of Agricultural Economics, Wiley Blackwell, vol. 51(3), pages 468-472, September.
    5. D. Roberts & J. Froud & R. W. Fraser, 1996. "Participation In Set Aside: What Determines The Opting In Price?," Journal of Agricultural Economics, Wiley Blackwell, vol. 47(1‐4), pages 89-98, January.
    6. Steven D. Hanson & George W. Ladd & Charles F. Curtiss, 1991. "Robustness of the Mean-Variance Model with Truncated Probability Distributions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(2), pages 436-445.
    7. Rulon D. Pope & Richard E. Just, 1991. "On Testing the Structure of Risk Preferences in Agricultural Supply Analysis," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(3), pages 743-748.
    8. Rob Fraser & Hild Rygnestad, 1999. "An Assessment of the Impact of Implementing the European Commission's Agenda 2000 Cereal Proposals for Specialist Wheatgrowers in Denmark," Journal of Agricultural Economics, Wiley Blackwell, vol. 50(2), pages 328-335, May.
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    Cited by:

    1. Rob Fraser, 2013. "To Cheat or Not To Cheat: Moral Hazard and Agri-environmental Policy," Journal of Agricultural Economics, Wiley Blackwell, vol. 64(3), pages 527-536, September.
    2. Rob Fraser, 2002. "Moral Hazard and Risk Management in Agri‐environmental Policy," Journal of Agricultural Economics, Wiley Blackwell, vol. 53(3), pages 475-487, November.
    3. David Colman, 2004. "Compte rendu d'ouvrage - Exploring the frontiers of agricultural economics : a review of volumes 2A and 2B of the Handbook of Agricultural Economics," Post-Print hal-01201082, HAL.
    4. Rob Fraser, 2004. "On the Use of Targeting to Reduce Moral Hazard in Agri‐environmental Schemes," Journal of Agricultural Economics, Wiley Blackwell, vol. 55(3), pages 525-540, November.
    5. Colman, David, 2004. "Compte rendu d'ouvrage - Exploring the frontiers of agricultural economics : a review of volumes 2A and 2B of the Handbook of Agricultural Economics," Cahiers d'Economie et de Sociologie Rurales (CESR), Institut National de la Recherche Agronomique (INRA), vol. 73.
    6. FRASER Iain & WASCHIK Robert, 2010. "Agricultural Land Retirement for Biodiversity: The Australian Wool Industry," EcoMod2003 330700055, EcoMod.
    7. Iain Fraser & Robert Waschik, 2005. "Agricultural Land Retirement and Slippage: Lessons from an Australian Case Study," Land Economics, University of Wisconsin Press, vol. 81(2).
    8. David Colman, 2004. "Compte rendu d'ouvrage - Exploring the frontiers of agricultural economics : a review of volumes 2A and 2B of the Handbook of Agricultural Economics," Cahiers d'Economie et Sociologie Rurales, INRA Department of Economics, vol. 73, pages 126-141.
    9. Olmos, Marta Fernandez & Rosell-Martinez, Jorge & Espitia-Escuer, Manuel Antonio, 2008. "The yield/quality trade-off and contractual choice," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6065, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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