Agri-environmental policy and moral hazard under multiple sources of uncertainty

Yuki Yano and David Blandford

European Review of Agricultural Economics, 2011, vol. 38, issue 1, 141-155

Abstract: Risk aversion has been considered a factor in mitigating the moral hazard problem in agri-environmental policy. If farmers face multiple sources of uncertainty, however, risk aversion could contribute to the problem. Focusing on a required reduction in the use of a potentially damaging input under an agri-environmental scheme, we address the implications of risk aversion for a farmer's decision on compliance. We show that risk aversion can indeed mitigate the moral hazard problem, but, if a required change in production practices increases output risk, the impact of risk aversion is ambiguous. Oxford University Press and Foundation for the European Review of Agricultural Economics 2010; all rights reserved. For permissions, please email journals.permissions@oup.com, Oxford University Press.

Date: 2011
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