Acceptable reforms of agri-environmental policies

We consider a model of regulation for nonpoint source water pollution where farmersare heterogenous along two dimensions, their ability to transform inputs into finalproduction and the productive land they possess. Regulation takes place through nonlinear taxation/subsidization of agricultural production and land, in the presence ofasymmetric information about ability to produce. We also introduce a political acceptability constraint implying that the regulation has to be optimally designed taking intoaccount the distribution of incomes in the pre-reform situation. We show that theoptimal reform essentially amounts to reallocate production towards less efficient farmers, who benefit from the reform at the expense of more efficient producers. Importantly, incentive compatibility requirement puts some strong restrictions on the wayproduction should be allocated in the agricultural sector and thereby, contrary to whathappens under perfect information, it allows to get some clear-cut results on who isover-compensated or under-compensated by the optimal regulatory reform. Last, we calibrate the model using data on a french watershed (Don watershed). Simulations indicate that, on our exemple, satisfying a high degree of acceptability may notentail high welfare losses compared to lower degrees of political sustainability. A lowsize farm has a higher probability of being a reform winner than a large farm, eventhough the regulator has no specific redistribution concern towards small farms.