Hidden action, risk aversion and variable fines in agri-environmental schemes
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This note analyses the design of agri-environmental schemes for risk-averse producers
whose input usage is only observable by costly monitoring. The scheme penalises producers
in proportion to input use in excess of a quota. A striking result is that if the
scheme is designed in such a way that producers always comply with the quota, risk
aversion is not relevant in determining the level of input use.