Contract design in agri-environmental schemes with fixed private transaction costs and countervailing incentives

The aim of this paper is to test therelevance of considering private fixed transaction costsfor contract design of Agri-Environmental Schemes,when transaction costs are negatively correlated tomarginal compliance costs. In order to do so, aprincipal-agent model of contract design under adverseselection, including fixed private transaction costs, isdeveloped. The model is applied to the design ofpayments in the Emilia Romagna region of Italy. Theresults show that fixed transaction costs in the range ofthose actually faced by farmers may significantly affectthe optimal amount of environmental good to beproduced by each farm type. In some cases, fixedtransaction costs can even reverse the standard insightthat more of a public good should be produced when thecost of its provision is lower (countervailing incentives).The results call for a higher attention to privatetransaction costs in the design of agri-environmentalcontracts.