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Agri-Environmental Policies design in Europe, USA and Australia: is an auction more cost-effective than a self-selecting contract schedule?

Listed author(s):
  • Vergamini, Daniele
  • White, Benedict
  • Viaggi, Davide

Various alternative agri-environmental payments approach have been theoretically and empirically designed in Europe (EU), United States (US) and Australia (AUS) with the aim to reduce information rent and increasing the costeffectiveness of the measures. Despite much theoretical analysis on incentive-compatible agri-environmental contracts and wide experimentation of conservation auction in the US and AUS, the main debate on the EU agri-environmental payment still focused on problem of efficiency instead of facing the effectiveness. The main obstacle to designing and implementing more efficient and targeted agri-Environmental Payments (AEP) is limited information on the side of policy makers which can give rise to adverse selection and moral hazard limiting the effectiveness of the schemes and making them expansive to run. Auctions are a category of innovative policy mechanism designed to address adverse selection and to induce farmers to reveal, through competitive bidding, their compliance costs to the government. This paper provide a simulation of an input based menu of contracts model, and of a one-shot procurement auction with data from Farm Accountancy Data Network 2012 (FADN) of Regione Emilia-Romagna (RER), in order to test the relevance of the two methods for designing more cost-effective AE payments. The case study developed for EmiliaRomagna (E-R) demonstrates the heterogeneity in compliance cost. The results of the auction model highlight a significant cost saving compared with the traditional flat rate schemes. The result of the contract model confirm that the recourse of the revelation principle and mechanism design have a potential to reduce information rent and negotiation cost. However, though not directly addressed in this paper, there are several recognized limitation in the literature, which could affect both simulation results and the ability of the methods to contribute in the design of cost-effective AE payments.

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Paper provided by Italian Association of Agricultural and Applied Economics (AIEAA) in its series 2015 Fourth Congress, June 11-12, 2015, Ancona, Italy with number 207357.

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Date of creation: Jun 2015
Handle: RePEc:ags:aiea15:207357
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  1. 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.
  2. Riley, John G & Samuelson, William F, 1981. "Optimal Auctions," American Economic Review, American Economic Association, vol. 71(3), pages 381-392, June.
  3. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, January.
  4. Thilo W. Glebe, 2008. "Scoring two-dimensional bids: how cost-effective are agri-environmental auctions?," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 35(2), pages 143-165, June.
  5. Adam Ozanne & Tim Hogan, 2001. "Moral hazard, risk aversion and compliance monitoring in agri-environmental policy," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 28(3), pages 329-348, October.
  6. Viaggi, D. & Raggi, M. & Gallerani, V., 2010. "Evaluating the potential contribution of contract auctions to Agri-Environmental Policy efficiency: A simulation model for Emilia-Romagna (Italy)," Agricultural Economics Review, Greek Association of Agricultural Economists, vol. 11(2), June.
  7. Rob Fraser, 2002. "Moral Hazard and Risk Management in Agri-environmental Policy," Journal of Agricultural Economics, Wiley Blackwell, vol. 53(3), pages 475-487.
  8. Claassen, Roger & Cattaneo, Andrea & Johansson, Robert, 2008. "Cost-effective design of agri-environmental payment programs: U.S. experience in theory and practice," Ecological Economics, Elsevier, vol. 65(4), pages 737-752, May.
  9. Chongwoo Choe & Iain Fraser, 1999. "Compliance Monitoring and Agri-Environmental Policy," Journal of Agricultural Economics, Wiley Blackwell, vol. 50(3), pages 468-487.
  10. 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.
  11. 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.
  12. Maskin, Eric S & Riley, John G, 1984. "Optimal Auctions with Risk Averse Buyers," Econometrica, Econometric Society, vol. 52(6), pages 1473-1518, November.
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