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Use of Penalties and Rewards in Agri-Environmental Policy

  • Yano, Yuki
  • Blandford, David
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    Achieving high compliance rates in incentive-based agri-environmental schemes is an important issue. This paper explores the use of a mixed penalty-reward approach under heterogeneous compliance costs. Specifically, we examine the use of a “compliance reward” under asymmetric information and output price uncertainty. Using a budget-neutral approach, three possible sources of financing are considered: 1. funds obtained by reducing monitoring effort; 2. the proceeds of fines collected from participating farmers who are inspected and found not to be in compliance; and 3. money saved by reducing the number of farmers enrolled. We discuss the advantages and disadvantages of each source of funding and analyze them numerically for both risk-neutral and risk-averse farmers. We show that under certain conditions a mixed penalty-reward system can increase the likelihood of compliance without increasing programme costs. For risk-averse farmers, however, conditions that ensure a positive outcome from compliance rewards become more restrictive. The implications of these findings are outlined for the future design of agri-environmental schemes with reference to cost-share working lands programmes such as EQIP in the United States.

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    File URL: http://purl.umn.edu/36873
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    Paper provided by Agricultural Economics Society in its series 82nd Annual Conference, March 31 - April 2, 2008, Royal Agricultural College, Cirencester, UK with number 36873.

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    Date of creation: 30 Mar 2008
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    Handle: RePEc:ags:aes008:36873
    Contact details of provider: Web page: http://www.aes.ac.uk
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    1. Chongwoo Choe & Iain Fraser, 1999. "Compliance Monitoring and Agri-Environmental Policy," Journal of Agricultural Economics, Wiley Blackwell, vol. 50(3), pages 468-487.
    2. Heyes, Anthony, 2000. "Implementing Environmental Regulation: Enforcement and Compliance," Journal of Regulatory Economics, Springer, vol. 17(2), pages 107-29, March.
    3. Andrea Cattaneo, 2003. "The Pursuit of Efficiency and Its Unintended Consequences: Contract Withdrawals in the Environmental Quality Incentives Program," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 25(2), pages 449-469.
    4. Spulber, Daniel F., 1988. "Optimal environmental regulation under asymmetric information," Journal of Public Economics, Elsevier, vol. 35(2), pages 163-181, March.
    5. 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.
    6. Fraser, Rob W., 2003. "On the use of targeting to reduce moral hazard in agri-environmental schemes," 2003 Conference (47th), February 12-14, 2003, Fremantle, Australia 57867, Australian Agricultural and Resource Economics Society.
    7. 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.
    8. 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.
    9. Fraser, Rob W., 2002. "Moral Hazard and Risk Management in Agri-Environmental Policy," 2002 Conference (46th), February 13-15, 2002, Canberra 125086, Australian Agricultural and Resource Economics Society.
    10. Harrington, Winston, 1988. "Enforcement leverage when penalties are restricted," Journal of Public Economics, Elsevier, vol. 37(1), pages 29-53, October.
    11. JunJie Wu & Bruce A. Babcock, 1996. "Contract Design for the Purchase of Environmental Goods from Agriculture," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(4), pages 935-945.
    12. Uwe Latacz-Lohmann & Carel Van der Hamsvoort, 1997. "Auctioning Conservation Contracts: A Theoretical Analysis and an Application," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 407-418.
    13. John K. Stranlund, 2006. "Risk Aversion and Compliance in Markets for Pollution Control," Working Papers 2006-2, University of Massachusetts Amherst, Department of Resource Economics.
    14. Friesen, Lana, 2003. "Targeting enforcement to improve compliance with environmental regulations," Journal of Environmental Economics and Management, Elsevier, vol. 46(1), pages 72-85, July.
    15. Rob Hart, 2005. "Combating moral hazard in agri-environmental schemes: a multiple-agent approach," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 32(1), pages 75-91, March.
    16. Benno Torgler, 2003. "Beyond Punishment: a tax compliance experiment with taxpayers in Costa Rica," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines, vol. 18(1), pages 27-56, June.
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