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 <roman>et al.</roman> (<roman>Journal of Agricultural Economics,</roman> Vol. 50, (1999) pp. 187-202) and Ozanne <roman>et al.</roman> (<roman>European Review of Agricultural Economics,</roman> Vol. 28, (2001) pp. 329-347), rather than the input charge mechanism of White (<roman>Journal of Agricultural Economics,</roman> Vol. 53, (2002) pp. 353-360), but the variable fine of the latter rather than the fixed fine assumed by Ozanne <roman>et al.</roman> (<roman>European Journal of Agricultural Economics,</roman> 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. Copyright 2007 Blackwell Publishing Ltd.