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Moral Hazard and Risk Management in Agri-Environmental Policy

  • Fraser, Rob W.

This paper develops the key finding of Hogan, Ozanne and Colman (2000) that risk aversion among farmers ameliorates the moral hazard problem in relation to agri-environmental policy compliance. It is shown that risk averse farmers who face uncertainty in their production income are more likely to comply with such a policy as a means of risk management. In addition, it is shown that a principal who has control over both the level of monitoring and the size of penalty if detected can reduce non-compliance by adjustments to these instruments which increase the variance of farmers’ income but leave the expected penalty unchanged. It is concluded that risk management by both principals and agents has the potential to diminish the moral hazard problem, especially given proposed developments in agri-environmental policy in the European Union.

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File URL: http://purl.umn.edu/125086
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Paper provided by Australian Agricultural and Resource Economics Society in its series 2002 Conference (46th), February 13-15, 2002, Canberra with number 125086.

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Date of creation: Feb 2002
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Handle: RePEc:ags:aare02:125086
Contact details of provider: Postal: AARES Central Office Manager, Crawford School of Public Policy, ANU, Canberra ACT 0200
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  1. Fraser, Rob W., 2001. "Using Principal-Agent Theory to Deal with Output Slippage in the European Union Set-Aside Policy," 2001 Conference (45th), January 23-25, 2001, Adelaide 125632, Australian Agricultural and Resource Economics Society.
  2. repec:ltr:wpaper:1997.08 is not listed on IDEAS
  3. Bourgeon, Jean-Marc & Jayet, Pierre-Alain & Picard, Pierre, 1995. "An incentive approach to land set-aside programs," European Economic Review, Elsevier, vol. 39(8), pages 1487-1509, October.
  4. Chongwoo Choe & Iain Fraser, 1997. "Compliance Monitoring and Agri-Environmental Policy," Working Papers 1997.08, School of Economics, La Trobe University.
  5. 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.
  6. C. Choe & I. Fraser, 1998. "A Note on Imperfect Monitoring of Agri-Environmental Policy," Journal of Agricultural Economics, Wiley Blackwell, vol. 49(2), pages 250-258.
  7. Bardsley, Peter & Harris, Michael, 1987. "An Approach To The Econometric Estimation Of Attitudes To Risk In Agriculture," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 31(02), August.
  8. Rob Fraser & Hild Rygnestad, 1999. "An Assessment of the Impact of Implementing the European Commission's "Agenda 2000" Cereal Proposals for Specialist Wheatgrowers in Denmark," Journal of Agricultural Economics, Wiley Blackwell, vol. 50(2), pages 328-335.
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