To Cheat or Not To Cheat: Moral Hazard and Agri‐environmental Policy

This Address examines the moral hazard problem in agri‐environmental policy. It begins with a theoretical analysis of moral hazard in this context, including the identification of eight potential causes of cheating behaviour among farmers. But is cheating behaviour among farmers actually a problem for agri‐environmental policy? And if it is, which are the statistically significant causes of concern? The answer seems to be: “we don't know” as there are currently no empirical analyses of the moral hazard problem and its causes in agri‐environmental policy. On this basis I analyse a set of policy solutions – to a problem for which we have no evidence of its causes or extent!     

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.     

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.     

Potential Conflict and Inefficiencies Arising in Agri‐environmental Management

We characterise the welfare implications of uncoordinated policy decisions in the presence of multiple externalities, illustrated with an aquifer. We concentrate on the problem of coordination that can occur when distinct agricultural and water authorities implement their respective policies (to optimise food production and groundwater use) with environmental concerns in mind. We represent this problem as an open‐loop Nash game, which compares the game‐theoretical solution to a centrally planned solution. We show that the inefficiencies arise from differences in the account taken of relevant costs by different authorities. We demonstrate that the magnitude of the inefficiency generated by the absence of coordination of our authorities varies depending on the weights put on environmental benefits by each authority, and discuss the implications of analysis for future research and policy.     

Agri‐environmental Instruments for an Integrated Rural Policy: An Economic Analysis

The new Rural Development Regulation of the EU reflects the shift of attention within rural areas from agricultural production towards rural development and embraces both farmers and non‐farm residents. While agricultural production is required to comply with environmental standards, rural areas also have to fulfil the growing demand for landscape, outdoor recreation and wildlife conservation. This paper develops a model of a rural area where farmers and non‐farm residents live together. A central government uses a combination of two‐policy instruments ‐ direct compensation payments and public services ‐ aimed at encouraging farmers to adopt environmentally beneficial practices and at the same time to increase the provision of countryside amenities and the sustained vitality of the rural area. The optimal mix of the policy instruments is evaluated under various governmental objectives. The analysis suggests that a combination of direct payments to farmers with the supply of local public services is a promising tool for rural policy development initiatives in the EU.     

Use of Compliance Rewards in Agri‐environmental Schemes

Ensuring that farmers comply with the terms of agri‐environmental schemes is an important issue. This paper explores the use of a ‘compliance–reward’ approach under heterogeneous net compliance costs with respect to cost‐share working lands programmes such as the Environmental Quality Incentives Program (EQIP) in the United States. Specifically, we examine the use of a reward under asymmetric information and output price uncertainty. We examine two possible sources of financing under the assumption of budget neutrality: (i) funds obtained by reducing monitoring effort; and (ii) money saved by reducing the number of farmers enrolled. We discuss the advantages and disadvantages of each source of funding and analyse these numerically for both risk‐neutral and risk‐averse farmers. We also examine the trade‐off between increased expenditure on monitoring effort and compliance rewards when additional budgetary resources are available. We show that under certain conditions a compliance reward can increase compliance rates. For risk‐averse farmers, however, conditions that ensure a positive outcome become more restrictive.     

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.     

Moral Hazard, Inspection Policy, and Food Safety

Buyers have imperfect information about the food safety efforts exerted by suppliers. To gather information about safety, buyers often employ sampling inspection. Sampling inspection exhibits sampling error so some unsafe product passes inspection and some safe product does not. This uncertainty influences buyer and supplier behavior. In this article, I use a principal–agent model to examine how sampling inspection policies influence food safety. I use the model to examine the sampling inspection policies in the 1996 Pathogen Reduction/Hazard Analysis Critical Control Point Act. I conclude that the regulation of sampling inspection procedures is an effective tool for policy makers who wish to improve food safety.     

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.     

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.     

Economic and Household Impacts of Projected Policy Changes for the Irish Agri‐food Sector

The policy environment for the Irish agri‐food sector could change rapidly in the coming decade. A potentially positive factor will be the elimination of milk quotas in 2015, although a potentially negative factor will be further trade liberalisation and increased import competition. These changes come on top of the move to decouple direct aids to farmers in 2005 as part of the Mid‐Term Review of the EU's Common Agricultural Policy agreed in 2003. This paper examines these reforms and their impacts on the Irish economy and income distribution using a CGE model particularly rich in detail on the agri‐food sectors, differentiated household groups, and agricultural policy instruments including their links to productive factors and households. The results suggest that the past and projected changes in the policy environment have, in sum, a small positive impact on GDP and household income. However, the gains and losses are unequally distributed across sectors and household groups due to the highly differentiated distribution of support and protection. Although all households generally gain from the sequence of policy reforms in the long run, some experience strong adverse effects from particular reforms and in the medium term.     

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.     

Optimal Design of Agri‐environmental Schemes under Asymmetric Information for Improving Farmland Biodiversity

Information asymmetry is one of the main obstacles to the effective design and implementation of agri‐environmental schemes (AES). The literature has generally addressed this issue through the use of principal‐agent models (PAM). We develop a PAM to support optimal design of a new AES for improving farmland biodiversity. We use the results of choice experiments to assess both the costs incurred by the agent for the provision of biodiversity and the resulting social benefits. We also make a number of novel contributions such as the inclusion of a non‐linear non‐compliance detection curve, a sensitivity analysis to identify which parameter estimates have a critical impact on PAM results, and analysis of the efficiency of different sanction scenarios. The results suggest that: (i) the second‐best solutions differ significantly from the optimal solutions attainable with perfect information, with farmers being strongly over‐compensated for the extra costs associated with improved biodiversity; (ii) monitoring levels should be higher; (iii) the sanction system should be tougher. Sensitivity analysis shows the need for accurate estimates of the marginal cost of public funds and the costs and benefits associated with the public goods, which represent the key parameters determining PAM results.     

Agri‐environmental auctions for phosphorus load reduction: experiences from a Finnish pilot

We examine environmental auctions on working agricultural lands. We organized a discriminatory auction where farmers were asked to make bids on spreading gypsum on their fields to reduce phosphorus loads to surface waters. The parcel‐specific bids were ranked based on their load reduction–compensation ratios. To assess load reductions, we built an environmental benefit index (EBI) based on three factors: P‐status of the soil (phosphorus available for crops), field slope and location with respect to waterways. As the per tonne price of gypsum delivery from the factory was higher for small quantities, the auction format allowed bundling of field parcels to reduce transportation costs. We evaluate auction's ability to target the environmental (or abatement) measures to field parcels with the highest load reduction potential and analyse the economic efficiency of the auction by comparing the pilot auction with simulated bidding behaviour and with hypothetical flat rate payment schemes. The pilot auction targeted the environmental measures effectively. It was also more efficient than a flat rate payment, even when the flat rate scheme was combined with an EBI eligibility criterion.     

Agri‐Environmental Regulations,Policies, and Programs

The literature on the interface between agriculture and the environment is highly diverse. This paper organizes this literature into three categories: regulation; adoption of environmental best management practices (BMPs) by farmers; and conservation programs. Within each category, the main research questions are set forth. After reviewing select papers, suggestions for future research are discussed. Academic research in this area has been impressive, but many issues and research questions remain unanswered. La littérature sur la corrélation entre l’agriculture et l’environnement est très diversifiée. Dans le présent article, nous avons divisé l’ensemble de cette littérature en trois catégories: la réglementation, l’adoption des meilleures pratiques de gestion environnementale de la part des agriculteurs et les programmes de conservation. Pour chaque catégorie, les principales questions de recherche ont étéénoncées. Une fois l’analyse des articles choisis terminée, nous avons examiné les suggestions en matière de recherche future. Bien que la recherche universitaire effectuée sur le sujet soit impressionnante, de nombreux problèmes et de nombreuses questions de recherche demeurent sans réponse.     

Introduction to a Symposium on Global Finance and the Agri‐food Sector: Risk and Regulation

This symposium introduction brings together two debates; the debate on global food prices and speculation, and the debate on so‐called global ‘land investment’ or ‘land grabbing’. Both debates are examining two sides of the same phenomenon – the growing role of private financial investors in the global agri‐food value chains and the myriad consequences of it. The symposium moves beyond the identification of finance as an exogenous factor to the trends in the sector. It examines real‐life incarnations of finance in the sector by looking at investment arrangements, including connections with the state, and its (regional) variations. The symposium addresses three main themes. First, it explores the interplay of the state and private finance. It shows that the effect of regulation is limited in the face of increasingly mobile and complex investment flows. Second, it addresses the shifts and transfigurations of risk in the agri‐food sector due to financialization. Third, the symposium discusses to what extent, and how, the origins and identity of farmland investors still matters within an increasingly globalized financial sector. The paper concludes by identifying some related areas for further research.