Contract design in agri-environmental schemes with fixed private transaction costs and countervailing incentives
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The aim of this paper is to test the
relevance of considering private fixed transaction costs
for contract design of Agri-Environmental Schemes,
when transaction costs are negatively correlated to
marginal compliance costs. In order to do so, a
principal-agent model of contract design under adverse
selection, including fixed private transaction costs, is
developed. The model is applied to the design of
payments in the Emilia Romagna region of Italy. The
results show that fixed transaction costs in the range of
those actually faced by farmers may significantly affect
the optimal amount of environmental good to be
produced by each farm type. In some cases, fixed
transaction costs can even reverse the standard insight
that more of a public good should be produced when the
cost of its provision is lower (countervailing incentives).
The results call for a higher attention to private
transaction costs in the design of agri-environmental
contracts.