Imperfect Regulation and Prior Incentives: Evidence from Nitrogen Pollution Control

Imperfect information and lobbying power often lead to imperfect regulations. This is presumably the case of the European Nitrates Directive, which aims to reduce water pollution from agricultural sources but has faced substantial resistance. We argue that farmers' responses to this imperfect regulation may depend on whether they have previously received economic incentives -Agri-Environmental Schemes (AES) -promoting the same practice. To test this, we examine the Directive's requirement that farmers implement cover crops on plots located in Nitrate Vulnerable Zones (NVZs). The staggered designation of municipalities as NVZs provides a natural identification strategy. Using difference-in-differences estimators applied to French farm-level data from 2000 to 2020, we find that, despite the presence of avoidance strategies, NVZ entry significantly increases cover crop adoption in both groups, with substantially larger effects among AES beneficiaries. These results suggest that economic and regulatory incentives can act as complements.