Moral Hazard,Targeting and Contract Duration in Agri‐Environmental Policy

This article extends the multi‐period agri‐environmental contract model of Fraser (Journal of Agricultural Economics, Vol. 55 , (2004) pp. 525–540) to include a more realistic specification of the inter‐temporal penalties for non‐compliance, and therefore of the inter‐temporal moral hazard problem in agri‐environmental policy design. It is shown that a farmer has an unambiguous preference for cheating early over cheating late in the contract period based on differences in the expected cost of compliance. It is then shown how the principal can make use of this unambiguous preference to target monitoring resources intertemporally, and in so doing, to encourage full contract duration compliance.     

Moral Hazard and Risk Management in Agri‐environmental Policy

This paper develops the key finding of Ozanne, Hogan and Colman (2001) that risk aversion among farmers ameliorates the moral hazard problem in relation to agrienvironmental policy compliance. It is shown that risk averse farmers who face uncertainty in their production income are more likely to comply with such a policy as a means of risk management. In addition, it is shown that a principal who has control over both the level of monitoring and the size of penalty, if detected, can reduce non‐compliance by adjustments to these instruments which increase the variance of farmers' income but leave the expected penalty unchanged. It is concluded that risk management by both principals and agents has the potential to diminish the moral hazard problem, especially given proposed developments in agri‐environmental policy in the European Union.     

On the Use of Targeting to Reduce Moral Hazard in Agri‐environmental Schemes

This paper investigates the role of targeting in the context of agri‐environmental schemes involving monitoring and penalties. By separating participants into a target and a nontarget group the aim of targeting is to reduce the moral hazard problem. The paper analyses three approaches to targeting which have different implications for the level of monitoring resources and the focus is on reducing the extent of cheating by participants in the nontarget group. By complementing the adoption of targeting with appropriate adjustments to the monitoring/penalty parameters, it is shown how such an approach can exploit the risk aversion of participants to completely eliminate cheating by those participants in the nontarget group. The implementation of such a system of targeting is discussed in the context of existing agri‐environmental policies.     

Determinants of the Willingness of Belgian Farmers to Participate in Agri‐environmental Measures

This paper explores the willingness of Belgian farmers to participate in two voluntary agri‐environmental policies. Farmers' contingent behaviour is analysed on the basis of survey data. Derivations based on a conceptual micro‐economic model indicate that decision subject and decision maker characteristics are important for farmers' participation. The model is empirically tested through the specification and estimation of a probit model. Consistency is found between the theoretical framework and the empirical results indicating that both the expected effect on farm production and the farmers' environmental attitude, which is more positive among younger and better educated farmers, are significant determinants of the acceptance rate of agri‐environmental policies. Other variables which influence participation decisions are farm size and previous experience of farmers themselves or of neighbouring farmers with agri‐environmental measures.     

Equivalence of Input Quotas and Input Charges under Asymmetric Information in Agri‐environmental Schemes

A model of adverse selection and moral hazard in agri‐environmental schemes is developed based on the input quota mechanism of Moxey et al. (Journal of Agricultural Economics, Vol. 50, (1999) pp. 187–202) and Ozanne et al. (European Review of Agricultural Economics, Vol. 28, (2001) pp. 329–347), rather than the input charge mechanism of White (Journal of Agricultural Economics, Vol. 53, (2002) pp. 353–360), but the variable fine of the latter rather than the fixed fine assumed by Ozanne et al. (European Journal of Agricultural Economics, Vol. 28, (2001) pp. 329–347) is used. Incentive‐compatible contracts, including the optimal probabilities of detection (and, therefore, monitoring frequencies and costs) for more and less efficient farmers, are identified. It is shown that the input charge and input quota approaches lead to identical outcomes – in terms of abatement levels, compensation payments, monitoring costs and probabilities of detection – confirming the equivalence of input quotas and input charges under asymmetric information. It is also shown that the optimal contracts are independent of the risk preferences of farmers with regard to being caught cheating.     

A Holistic vs. an Attribute‐based Approach to Agri‐Environmental Policy Valuation: Do Welfare Estimates Differ?

Different economic valuation methodologies can be used to value the non‐market benefits of an agri‐environmental scheme. In particular, the non‐market value can be examined by assessing the public’s willingness to pay for the policy outputs as a whole or by modelling the preferences of society for the component attributes of the rural landscape that result from the implementation of the policy. In this article we examine whether the welfare values estimated for an agri‐environmental policy are significantly different between an holistic valuation methodology (using contingent valuation) and an attribute‐based valuation methodology (choice experiment). It is argued that the valuation methodology chosen should be based on whether or not the overall objective is the valuation of the agri‐environment policy package in its entirety or the valuation of each of the policy’s distinct environmental outputs.     

Factors Affecting Farmers’ Participation in Agri‐environmental Measures: A Northern Italian Perspective

Agri‐environmental measures play an important role in Italian rural areas, as shown by the financial commitment to the Rural Development programmes. However, in contrast with other European Union (EU) countries, policy‐makers still have limited experience on how farmers approach environmental incentive schemes. This paper casts new light on this issue from a northern Italian perspective. The rationale of the farmers’ decision‐making process is explored using two multinomial models. The first explains the probability of non‐participation or participation in one of three specific agri‐environmental measures. The model outcomes show that labour‐intensive farming types and high dependency of household income on farming activity constrain farmers’ participation, whereas previous experience, easy‐to‐implement environmentally friendly farm practices and adequate compensation of extra costs encourage participation. The second model explores the effect of farmers’ attitudes and beliefs on their predispositions towards participation in any of the schemes. The results highlight that, besides income factors, the farm's future in the business, and the relationship with neighbouring farmers and their opinions on environmentally friendly practices all have significant effects on adoption of agri‐environmental measures. The paper concludes by suggesting that farmers’ attitudes and beliefs, as well as the local behavioural influences, have to be taken into account when designing and communicating agri‐environmental measures.     

The Potential for Cross‐Compliance in Canadian Agricultural Policy: Linking Environmental Goals with Business Risk Management Programs

Environmental cross‐compliance links agricultural program payments to producer commitments to achieve agri‐environmental policy goals. The objective of this study is to determine the feasibility of using cross‐compliance to achieve environmental goals in a Canadian policy context. While Canadian policy makers have flirted with cross‐compliance, with the exception of phosphorus regulations for Quebec hog farms, they have never adopted this approach. The potential for effective cross‐compliance depends on producer participation, producer compliance with regulations, environmental performance, and overall welfare implications. This study reviews the application of cross‐compliance in the United States and EU with regard to the potential application to Canadian agriculture. Policy options are considered which link current business risk management (BRM) programs to alternative environmental regulations (wildlife habitat preservation, nutrient management plans, and beneficial management practices for nutrient management). In general, individual Canadian agricultural support program do not provide sufficient incentives for farmers to participate in cross‐compliance. However, if support programs are combined, it is better to link programs that redistribute income with environmental programs than to link agriculture programs that already address specific market failures.     

Moral hazard and adverse selection effects of cost‐of‐production crop insurance: evidence from the Philippines

This article examines the moral hazard and adverse selection effects of cost‐of‐production (COP) crop insurance products. Building on existing crop insurance models of moral hazard, as well as a survey‐based data set that allows us to separately identify moral hazard from adverse selection, we find evidence that farmers insured under COP contracts spend more on chemical fertilizers and pesticides (i.e. those inputs whose costs determine the indemnity payments). However, since these same COP insured farmers are still likely to use less inputs (like effort) whose costs do not enter the indemnity payment formula, and yield depends on both types of inputs (i.e. the determinants and non‐determinants of the indemnity payments), the final moral hazard effect of COP insurance on yields is ambiguous. Our analysis also suggests that farmers who tend to spend less on chemical fertilizers and pesticides are the ones with private information on soil conditions and pest incidence. These are the types of farmers who adversely select into COP contracts that only cover weather related losses.     

Challenges and Options for the UK Agri‐Environment: Presidential Address

After fifteen years of agri‐environment policy it is now appropriate to take stock of these policies. This is important because these policies are scheduled to expand in the coming decade, their benefits are likely to continue growing and the demand for benefits is also likely to expand. This paper therefore reviews the current agri‐environmental situation, isolating some of the current challenges to the schemes implemented in the UK, and compares main options for their amelioration. Finally it focuses particularly on the “end of contract problem” arising from the weak sustainability of the policy benefits from short‐term voluntary contracts.     

A response to Doole and Marsh () article: methodological limitations in the evaluation of policies to reduce nitrate leaching from New Zealand agriculture

A recent paper by Doole and Marsh (2013), questioned the validity of using the New Zealand Forest and Agriculture Regional Model (NZFARM) for New Zealand agri‐environmental policy analysis. We respond to their critique by clearly describing the model structure, explaining the NZFARM parameterisation, calibration, and validation procedure, and presenting estimates from a series of nutrient reduction policy scenarios to highlight the utility of the model. In doing so, we demonstrate that NZFARM generates logical and intuitive results that can be used for robust agri‐environmental policy decision‐making.     

Farmers' Preferences and Social Capital Regarding Agri‐environmental Schemes to Protect Birds

The steady decline of birds living in cereal steppe lands is a worrying situation that the European Common Agricultural Policy is attempting to remedy through the application of agri‐environmental schemes (AES). We assess farmers' preferences towards these AES, which call for a number of environmental practices to protect birds. Using a face‐to‐face survey in farming communities in Aragón (Spain), and through the estimation of an Ordered Logit model (OL), we assess the ranking of AES attributes, and obtain their economic valuation according to the farmers' preferences. We find that social factors are also important in determining farmers' decisions. In particular, the importance of social trust and expectation of compliance by other neighbours, encourage farmers to sign up to AES. These and other results may be used to design more effective AES and help to solve this important biodiversity problem.     

Semi‐Subsistence Farming: An Elusive Concept Posing Thorny Policy Questions

The massive expansion of semi‐subsistence farming in the European Union after the Eastern enlargements poses a real challenge to rural development. The problems of semi‐subsistence farms are low cash incomes and incidence of poverty, sub‐optimal use of land and labour, a lack of capital and poor contribution to rural growth. However, they play an important welfare function in some rural areas in Europe; they manage more than 11 million ha of agricultural land and deliver ecosystem services. The Common Agricultural Policy will have to accommodate this now widespread production system, through existing or new policy packages. Particularly important is support for commercialisation to incentivise and smooth the transition to commercial agriculture, and agri‐environmental payments to compensate the semi‐subsistence farmers for the provision of ecosystem services.     

Crop Insurance in a Political Economy: An Alternative Perspective on Agricultural Policy

Lawmakers often subsidize farmers in times of financial distress. This article models this political impulse as a constraint on government farm policy, describing how ex ante government farm insurance can deter ex post "disaster relief" and improve production incentives by countering the moral hazard that otherwise prevails. Absent ex ante government policy, ex post relief takes the form of revenue insurance, which prompts excessive entry into farm production and under-production by operating farmers. Ex ante government policy can raise economic and political welfare by buying out low productivity farmers and offering profitable farmers a combination of revenue insurance, price supports, and a program participation fee.     

Role of international politics on agri‐food trade: Evidence from US–Canada bilateral relations

A well‐functioning trade relationship between Canada and the United States is crucial to the economic vitality of the Canadian agri‐food industry. However, agri‐food trade is more susceptible than other sectors to political interventions. The Trump presidency has strained Canada–US relations and his trade policy actions have significantly increased trade restrictions and trade policy uncertainty and undermined the rules‐based global trading system. We examine the pattern of agri‐food trade between the two countries and find that the upward trajectory of bilateral agri‐food trade ended in 2013. Although this flatlining predates the Trump administration, we show that Trump increased trade policy uncertainty starting in 2017 and likely impacted further expansion of trade. We examine what might change under the Biden presidency and argue that the new administration is likely to restore strong relationships with allies and work to rebuild important international institutions such as the World Trade Organization (WTO). Although protectionist forces will continue to impact bilateral agri‐food trade, we expect closer political ties between a Biden administration and the Canadian Prime Minister. This should have a positive effect on the Canadian agri‐food industry by reducing trade uncertainties, thereby increasing agri‐food trade between Canada and the United States.     

United States–Cuba Agricultural Relations and Agrarian Questions

In the wake of Cuba's far‐reaching, halting economic reforms, geopolitical rapprochement and trade openings with the United States (US) offer opportunities and risks for Cuban small‐scale farmers and agrarian cooperatives: pressures, paradoxes and potential abound. Meanwhile, on the margins, agro‐ecologically oriented tours bring admiring US students, farmers and agrarian advocates. Cubans concur that the country must solve key problems in its agricultural sector to overcome the contradictions of its agri‐food model, and that this entails more exchange with the US – but in what capacity and on what terms? The current crossroads begs the classic agrarian question, even as it updates it. Having experienced and survived the promises and disasters of both capitalist and communist agricultural economies, Cuban farmers expand the original ‘peasant’ protagonist. As they navigate new non‐state markets and recent re‐entrenchment of state control of prices, Cuban farmers and cooperatives struggle to avoid monopolizing tendencies of unfettered capitalist as well as communist agricultural economies – both of which have historically been ecologically damaging. US agribusiness courts Cuba, but not as mere unidirectional capture: Cubans are inviting and leveraging trade to end the embargo, which is increasingly being modified altogether. Key Cuban agrarian principles of resilience and cooperativismo have persisted through capitalist and communist crises: could they influence prospects for agro‐industrial hegemony from the North?      

Modelling Farmers’ Participation in an Agri‐environmental Scheme using Panel Data: An Application to the Rural Environment Protection Scheme in Ireland

Previous studies that have attempted to model the participation decision of farmers in agri‐environmental schemes have used a static framework where it was not possible to examine changes in the participation decision of farmers over time. This is rectified in this paper by utilising an 11‐year panel that contains information on 300 farmers for each year. The structure of this dataset allows us to employ discrete time duration random effects panel data logit models to model the determinants of entering the Irish Rural Environment Protection Scheme (REPS). We introduce a dynamic element into a number of the models by using the random effects logit model estimator, with lagged dependent variables as additional explanatory variables. The results point to the fact that systems of farming that are more extensive and less environmentally degrading remain those most likely to participate in the REPS. In addition, the results highlight the fact that where no attempt is made to control for unobserved heterogeneity or path dependency the effects of the farm‐ and farmer‐specific characteristics may be overestimated.     

Impacts of Decoupled Agricultural Support on Farm Structure,Biodiversity and Landscape Mosaic: Some EU Results

The decoupling of direct payments from production represents a substantial reform of the Common Agricultural Policy (CAP). Farmers are no longer required to produce commodities to be entitled to support but only to keep land in Good Environmental and Agricultural Condition. If output declines as a result, there is concern that landscape services produced jointly with commodities will also decline. The aim of this paper is to assess the long‐term effects of the 2003 reform on farm structure, landscape mosaic and biodiversity for a sample of EU regions. Impacts are quantified using a spatial agent‐based modelling approach by simulating agricultural development with links to indicators of landscape value. Our results demonstrate that eliminating the link between support payments and production has possible negative consequences for the landscape, but only under particular circumstances. It is shown that these effects could be offset by strengthening (Pillar II) agri‐environmental schemes. Further the single payment scheme results in higher land rental prices which reduces its ability to achieve its goal of providing income security for farmers. Implications of these results for the direction of continued CAP reform are discussed.     

Auctioning contracts for environmental services

Policy‐based markets for environmental services include government procurement, private procurement to satisfy regulatory requirements and private procurement through government offset markets. These markets are increasingly popular and raise questions about optimal procurement under different regulatory frameworks. The design of these schemes draws together issues in auction design and contract theory. Using a mixed adverse selection, moral hazard model, we show that optimal contract design may differ significantly between procurement and regulatory policy environments. We model risk averse landholders to preserve a key feature of the policy environment. These findings have implications for the design of pollution reduction schemes and the rehabilitation of environmental assets.