Contract Design and Targeting for the Production of Public Goods in Agriculture: The Impact of the 2003 Cap Reform

The objective of this paper is to compare different ways of designing agri-environmental contracts and to set targeting under adverse selection, comparing conditions before and after CAP reform 2003. The results suggest that the present contract structure may be relevantly improved through a more accurate design and a clearer target. The reform, through the decoupling mechanism, will contribute to reduce the opportunity cost of the adoption of agri-environmental measures. This may increase the optimal amount of public goods produced by agriculture and will encourage participation by farmers. However, in order to properly exploit the new conditions brought by the 2003 reform, it is necessary to review the way agri-environmental payments are assigned and their structure, in terms of targeting, contract differentiation and payment allocation.