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Adverse Selection in the Environmental Stewardship Scheme: Does the Higher Level Stewardship Scheme Design Reduce Adverse Selection?

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  • Emmanuelle Quillérou
  • Rob Fraser

Abstract

The Environmental Stewardship Scheme provides payments to farmers for the provision of environmental services based on foregone agricultural income. This creates a potential incentive compatibility problem which, combined with information asymmetry about farm land potential, can lead to adverse selection of land into the Scheme and therefore a less cost-effective provision of environmental goods and services. However, the Higher Level Stewardship (HLS) Scheme 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 reduced the adverse selection problem through contracting a greater overall area and thus higher overall environmental benefit. 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 in the regulator's allocation of contracts, thereby also reducing the adverse selection problem. Copyright (c) 2010 The Authors. Journal compilation (c) 2010 The Agricultural Economics Society.

Suggested Citation

  • Emmanuelle Quillérou & Rob Fraser, 2010. "Adverse Selection in the Environmental Stewardship Scheme: Does the Higher Level Stewardship Scheme Design Reduce Adverse Selection?," Journal of Agricultural Economics, Wiley Blackwell, vol. 61(2), pages 369-380.
  • Handle: RePEc:bla:jageco:v:61:y:2010:i:2:p:369-380
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    References listed on IDEAS

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    1. Andrew Moxey & Ben White & Adam Ozanne, 1999. "Efficient Contract Design for Agri-Environment Policy," Journal of Agricultural Economics, Wiley Blackwell, vol. 50(2), pages 187-202.
    2. Feng, Hongli, 2007. "Green payments and dual policy goals," Journal of Environmental Economics and Management, Elsevier, vol. 54(3), pages 323-335, November.
    3. Connor, Jeffery D. & Ward, John R. & Bryan, Brett, 2008. "Exploring the cost effectiveness of land conservation auctions and payment policies," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 52(3), September.
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    5. Rob Fraser, 2009. "Land Heterogeneity, Agricultural Income Forgone and Environmental Benefit: An Assessment of Incentive Compatibility Problems in Environmental Stewardship Schemes," Journal of Agricultural Economics, Wiley Blackwell, vol. 60(1), pages 190-201.
    6. Nick Hanley & Sergio Colombo & Pamela Mason & Helen Johns, 2007. "The Reform of Support Mechanisms for Upland Farming: Paying for Public Goods in the Severely Disadvantaged Areas of England," Journal of Agricultural Economics, Wiley Blackwell, vol. 58(3), pages 433-453, September.
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    Cited by:

    1. Russell, Noel P. & Sauer, Johannes, 2012. "Beneficial selection and the efficient procurement of ecosystem services," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124894, Agricultural and Applied Economics Association.
    2. Russell, Noel P. & Sauer, Johannes, 2012. "Efficient Procurement of Ecosystem Services – Adverse versus Beneficial Selection," 86th Annual Conference, April 16-18, 2012, Warwick University, Coventry, UK 134988, Agricultural Economics Society.
    3. Quillerou, Emmanuelle & Fraser, Rob W. & Fraser, Iain, 2010. "Adverse Selection in the Environmental Stewardship Scheme: Evidence in the Higher Level Stewardship Scheme?," 84th Annual Conference, March 29-31, 2010, Edinburgh, Scotland 91676, Agricultural Economics Society.

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