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Incentive Contract and Weather Risk

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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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    References listed on IDEAS

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    1. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
    2. 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.
    3. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    4. 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.
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    1. Canessa, Carolin & Venus, Terese E. & Wiesmeier, Miriam & Mennig, Philipp & Sauer, Johannes, 2023. "Incentives, Rewards or Both in Payments for Ecosystem Services: Drawing a Link Between Farmers' Preferences and Biodiversity Levels," Ecological Economics, Elsevier, vol. 213(C).
    2. Canessa, Carolin & Venus, Terese & Wiesmeier, Miriam & Mennig, Philipp & Sauer, Johannes, 2023. "Farmers’ preferences over alternative AECS designs. Do the ecological conditions influence the willingness to accept result-based contracts?," 97th Annual Conference, March 27-29, 2023, Warwick University, Coventry, UK 334508, Agricultural Economics Society - AES.

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    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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