Adverse Selection in the Environmental Stewardship Scheme: Does the Higher Level Entry Scheme Design Reduce Adverse Selection?
AbstractThe Environmental Stewardship Scheme provides payments to farmers for the provision of environmental services based on agricultural foregone income. This creates a potential incentive compatibility problem which, combined with an information asymmetry on farm land heterogeneity, could lead to adverse selection of farmers into the scheme. However, the Higher Level Scheme (HLS) design includes some features that potentially reduce adverse selection. This paper studies the adverse selection problem of the HLS using a principal agent framework at the regional level. It is found that, at the regional level, the enrolment of more land from lower payment regions for a given budget constraint has led to a greater overall contracted area (and thus potential environmental benefit) which has had the effect of reducing the adverse selection problem. In addition, for landscape regions with the same payment rate (i.e. of the same agricultural value), differential weighting of the public demand for environmental goods and services provided by agriculture (measured by weighting an environmental benefit function by the distance to main cities) appears to be reflected into the regulator’s allocation of contracts, thereby also reducing the adverse selection problem.
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Bibliographic InfoPaper provided by Agricultural Economics Society in its series 83rd Annual Conference, March 30-April 1, 2009, Dublin, Ireland with number 51068.
Date of creation: 01 Apr 2009
Date of revision:
Adverse selection; agri-environment; Environmental Stewardship; principal-agent; contract; Environmental Economics and Policy; D78; D82; H44; Q18; Q58;
Find related papers by JEL classification:
- D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- H44 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Goods: Mixed Markets
- Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy
- Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
This paper has been announced in the following NEP Reports:
- NEP-AGR-2009-08-16 (Agricultural Economics)
- NEP-ALL-2009-08-16 (All new papers)
- NEP-CTA-2009-08-16 (Contract Theory & Applications)
- NEP-ENV-2009-08-16 (Environmental Economics)
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