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!     

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.     

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.     

Bilateral Information Asymmetry in the Design of an Agri‐Environmental Policy: An Application to Peatland Retirement in Norway

Agriculture is a significant source of global greenhouse gas (GHG) emissions. GHG mitigation through agri‐environmental programmes could be important in achieving emission reduction targets under the 2015 UN climate agreement. This study uses the principal‐agent model to examine a peatland retirement programme to reduce agricultural emissions in Norway. The focus is on the role of the government's private information in programme design. Two cases are examined. First, optimal contracts are derived when farmers have private information about the costs of implementing peat land retirement, but the government reveals its information on the resulting public benefits through differentiated contracts. This corresponds to the standard targeting strategy with one‐sided information asymmetry. In the second case, an informed principal model developed by Maskin and Tirole in a 1990 study is employed to address bilateral information asymmetry. Using the informed principal model, the government offers the same menu of contracts to farmers in order not to disclose information on the public benefits from land retirement. Empirical results show that the government can achieve a higher payoff by using a pooling offer.     

Farmer Compensation and its Consequences for Environmental Benefit Provision in the Higher Level Stewardship Scheme

The Environmental Stewardship Scheme (ESS) provides payments to farmers for the provision of environmental services based on forgone agricultural income. Consequently, farmers with a relatively low opportunity cost of agricultural land will be particularly attracted to apply for entry into the ESS within a given payment region. This article tests whether there exists a significant relationship between Higher Level Stewardship (HLS) Scheme entry and agricultural yields. Empirically, HLS participation is found to be negatively related to cereal yields at the farm level. This could be associated with ‘auspicious selection’ of land into the Scheme, with greater ‘value for money’ provided by the higher entry of land with lower agricultural forgone income but higher environmental benefit within the region.     

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.     

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.     

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.     

The Effect of Mandatory Agro‐Environmental Policy on Farm Fertiliser and Pesticide Expenditure

EU farmers are subject to mandatory cross‐compliance measures, requiring them to meet environmental conditions to be eligible for public support. These obligations reinforce incentives for farmers to change their behaviour towards the environment. We apply quasi‐experimental methods to measure the causal relationship between cross‐compliance and some specific farm environmental performance. We find that cross‐compliance reduced farm fertiliser and pesticide expenditure. This result also holds for farmers who participated in other voluntary agro‐environmental schemes. However, the results do not support our expectations that farmers who relied on larger shares of public payments had a stronger motivation to improve their environmental performance.     

Farmers’ Preferences for New Environmental Policy Instruments: Determining the Acceptability of Cross Compliance for Biodiversity Benefits

This paper addresses the issue of farmers’ views concerning the perceived legitimacy of environmental cross compliance as a governance mechanism. Recent work on the theory of regulation emphasises the importance of the legitimacy ascribed to a regulation in determining the effectiveness with which it can be implemented. The current study outlines a rationale for why this motivational question should receive attention in economic studies of policy design and reports the results of a survey of 102 arable farmers in East Anglia, UK, which investigated the level of support for the principle of cross compliance for biodiversity objectives. It was found that two attitudinal factors, referred to as ‘Stewardship Orientation’ and ‘Technological Beliefs’, were by far the most significant in determining the acceptability of cross compliance in the sample, and that structural and socio‐demographic factors were considerably less important. The study also identified clusters of farmers according to their overall attitudinal orientation. Of the five groups thus categorised, four appeared on average likely to reject cross compliance as a general principle, leaving only the most ‘Environmental’ cluster in support. The policy implications are discussed and some conclusions drawn.     

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.     

Farm Level Costs of Agri‐environment Measures: The Impact of Entry Level Stewardship on Cereal Farm Incomes

Applying a difference‐in‐difference approach with propensity score matching, we examine the impact of participation in the Entry Level Stewardship (ELS) scheme on cereal farm incomes in eastern England. We assess the extent to which impacts are related to a) the source of income affected – whether only from agricultural or total business income; b) the channel of the impact – through land use and/or labour input; and c) the level of impacts through time. In addition, we assess the appropriateness of the level of the ELS payment. We find that: a) entering the ELS scheme could negatively affect cereal farm incomes – in particular, the total business income; b) that negative impacts arise primarily in relation to the use of land resources; c) that impacts may diminish over a relatively short period of time; and d) that the ELS payment broadly compensates for losses without providing over compensation. Given the diminishing negative impact over time, the level of ELS payment might need to be reviewed in the longer term, although policy evaluation should consider the wider implications for efficiency of alternative payment levels. We also discuss some limitations of the approach and potential extensions.     

Erosion mitigation in the Waikato District,New Zealand: economic implications for agriculture

Soil erosion, in its various forms, is caused or aggravated by agricultural activities. Mitigation of surface erosion comprises the construction of shelterbelts, fencing, riparian buffering, and stock reduction. Mitigation of mass‐movement erosion, in turn, takes the form of spaced planting of trees to maintain a persistent, healthy, and complete ground cover. In this article, we assess the economic implications to agriculture of the adoption of mitigation alternatives for erosion control in the Waikato District, New Zealand. The Waikato District presents a spatial pattern of erosion that affects profitability of dairy, and sheep and beef enterprises. We use the Universal Soil Loss Equation and the New Zealand Empirical Erosion Model to estimate erosion figures that are then fed into an economic‐focused, nonlinear, partial equilibrium mathematical programming model of New Zealand land use. Different scenarios are constructed for surface and mass‐movement soil erosion targets ranging from 0% to 50% below baseline levels. We find that achieving surface erosion targets is more expensive than mass‐movement targets, and results in different responses in regional‐level costs, land use, enterprise net revenue, and adoption of mitigation alternatives.     

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.     

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.     

Land Heterogeneity,Agricultural Income Forgone and Environmental Benefit: An Assessment of Incentive Compatibility Problems in Environmental Stewardship Schemes

This paper examines the issue of incentive compatibility within environmental stewardship schemes, where incentive payments to farmers to provide environmental goods and services are based on foregone agricultural income. The particular focus of the paper is land heterogeneity, either of agricultural or environmental value, leading to divergence between the actual and socially optimal level of provision of environmental goods and services. Given land heterogeneity, such goods and services are likely to be systematically over‐ or under‐provided in response to a flat rate payment for income foregone.     

Targeting,bias, and expected impact of complex innovations on developing‐country agriculture: evidence from Malawi

Agronomic analyses of new technologies are often conducted under carefully controlled research station programs or trials managed by self‐selected farmers. Oftentimes, the technologies are then scaled up with minimal evaluation under real‐world conditions. Yet, the interim step between agronomic trials and large‐scale promotion is crucial to generate evidence on the social and economic impact of technologies that is both internally valid and generalizable. The article focuses on a participatory action research program in Malawi designed to test and identify scalable technology options to intensify the smallholder sector and contribute to poverty reduction and food and nutrition security. We examine the socioeconomic characteristics of farmers testing technologies and find evidence of systematic targeting of better‐endowed farmers. After controlling for observable differences using matching and a doubly robust estimator, we find evidence of early positive effects on maize yield and harvest value, although placebo tests suggest possible selection on unobservables. We note that attention should be given to program design and household characterization to better define and improve targeting criteria, technology selection, and external validity.     

Geographical indication regulation and intra‐trade in the European Union

Protection of indications of geographical origin (GIs) can reduce information asymmetry between producers and consumers, and potentially enhance trade. However, GIs can also possibly divert trade. We rely on panel data about agri‐food trade among the 27 countries of the European Union to investigate these issues using variations of estimators proposed by Head and Mayer ( 2000 ) and Santos Silva and Tenreyro ( 2006 ). Our findings suggest that the protection of GIs creates trade when the importing and exporting countries have GI‐protected products. There is also empirical evidence regarding a trade‐diverting effect when the importing country does not have GIs and a border enlargement effect arising from European GI‐protection.     

Agricultural Policy Reform and Off‐farm Labour Decisions

Off‐farm labour decisions of a sample of Kansas farmers are evaluated. The central question of our analysis pertains to whether 1996 US farm policy reforms may have altered the decisions to work off the farm. The effects of policy decoupling on off‐farm labour are complex: different aspects of policy changes can have opposing effects on off‐farm work decisions. Essentially, this makes this issue an empirical question. Results show that the introduction of fixed, decoupled payments in 1996 might have reduced the likelihood of off‐farm labour participation. However, the new policy environment may have increased farm households’ revealed aversion to risk, motivating a higher participation in non‐farm labour markets. The effects of 1996 policy reforms on farm income variability could have been attenuated by changes in US crop insurance programmes and by an increase in emergency assistance payments towards the end of the 1990s. The reduction in price supports may have increased the motivation for working off the farm. The net effect of the overall reforms on off‐farm work participation is not likely to have been large.