Incentives, Information & Drought Policy
Australia is subject to widespread droughts, with significant financial implications for agricultural producers, regional, state and national economies. Most economic assessments conclude there is no economic efficiency case for governments to provide drought assistance. However, significant public funds are allocated to farmers during droughts and there is a second-best case to improve drought policy design. In the paper it is argued that the National Drought Policy suffers from adverse selection, moral hazard, incentive compatibility and government commitment problems. The key reason this approach is ineffective is that it is very difficult if not impossible to design an efficient and fair drought policy that relies on ex post revelation of information. An alternative approach is investigated where incentives are designed so that farmers self-select into one of a number of drought policy agreements or contracts. Under this approach, farmers would be offered either a subsidy on risk management actions, such as privately provided rainfall insurance/weather derivatives and self-insurance, thereby forgoing other forms of drought assistance; or assistance to adjust out of the sector. Although there are dead weight losses associated with these forms of assistance, there are likely to be offsetting efficiency gains if adverse selection and moral hazard can be reduced. The government commitment problem also needs to be addressed through better institutional design.
|Date of creation:||2005|
|Contact details of provider:|| Postal: AARES Central Office Manager, Crawford School of Public Policy, ANU, Canberra ACT 0200|
Phone: 0409 032 338
Web page: http://www.aares.info/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, July.
- Potters, Jan & Van Winden, Frans, 1990. "Modelling political pressure as transmission of information," European Journal of Political Economy, Elsevier, vol. 6(1), pages 61-88, August.
- Douglas, Robert A., 1995. "Improving the Efficiency of Taxation of Livestock in Australia," Review of Marketing and Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 63(01), April.
- John C. Quiggin, 1986.
"A Note On The Viability Of Rainfall Insurance,"
Australian Journal of Agricultural and Resource Economics,
Australian Agricultural and Resource Economics Society, vol. 30(1), pages 63-69, 04.
- Quiggin, John C., 1986. "A Note On The Viability Of Rainfall Insurance," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 30(01), April.
- Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:ags:aare05:137924. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.