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Incentive Contract and Weather Risk

Author

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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

Suggested Citation

  • Patrice Loisel & Bernard Elyakime, 2006. "Incentive Contract and Weather Risk," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 35(2), pages 99-108, October.
  • Handle: RePEc:kap:enreec:v:35:y:2006:i:2:p:99-108
    DOI: 10.1007/s10640-006-9009-z
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    File URL: http://hdl.handle.net/10.1007/s10640-006-9009-z
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    References listed on IDEAS

    as
    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. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    3. Peter Goldsmith & Rishi Basak, 2001. "Incentive Contracts and Environmental Performance Indicators," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 20(4), pages 259-279, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation

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