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Adverse Selection in the Environmental Stewardship Scheme: Does the Higher Level Entry Scheme Design Reduce Adverse Selection?

  • Quillerou, Emmanuelle
  • Fraser, Rob W.

The Environmental Stewardship Scheme provides payments to farmers for the provision of environmental services based on agricultural foregone income. This creates a potential incentive compatibility problem which, combined with an information asymmetry on farm land heterogeneity, could lead to adverse selection of farmers into the scheme. However, the Higher Level Scheme (HLS) design includes some features that potentially reduce adverse selection. This paper studies the adverse selection problem of the HLS using a principal agent framework at the regional level. It is found that, at the regional level, the enrolment of more land from lower payment regions for a given budget constraint has led to a greater overall contracted area (and thus potential environmental benefit) which has had the effect of reducing the adverse selection problem. In addition, for landscape regions with the same payment rate (i.e. of the same agricultural value), differential weighting of the public demand for environmental goods and services provided by agriculture (measured by weighting an environmental benefit function by the distance to main cities) appears to be reflected into the regulator’s allocation of contracts, thereby also reducing the adverse selection problem.

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File URL: http://purl.umn.edu/51068
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Paper provided by Agricultural Economics Society in its series 83rd Annual Conference, March 30-April 1, 2009, Dublin, Ireland with number 51068.

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Date of creation: 01 Apr 2009
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Handle: RePEc:ags:aesc09:51068
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  1. Rob Fraser, 2009. "Land Heterogeneity, Agricultural Income Forgone and Environmental Benefit: An Assessment of Incentive Compatibility Problems in Environmental Stewardship Schemes," Journal of Agricultural Economics, Wiley Blackwell, vol. 60(1), pages 190-201.
  2. 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.
  3. Harris Milton & Townsend, Robert M, 1981. "Resource Allocation under Asymmetric Information," Econometrica, Econometric Society, vol. 49(1), pages 33-64, January.
  4. 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.
  5. Feng, Hongli, 2007. "Green payments and dual policy goals," Journal of Environmental Economics and Management, Elsevier, vol. 54(3), pages 323-335, November.
  6. Bateman, Ian J. & Day, Brett H. & Georgiou, Stavros & Lake, Iain, 2006. "The aggregation of environmental benefit values: Welfare measures, distance decay and total WTP," Ecological Economics, Elsevier, vol. 60(2), pages 450-460, December.
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