Set-Aside versus Quotas in Contracts for Agro-Environmental Regulation

In this paper, we analyze the simultaneous regulation of several goods produced on agricultural land such as environmental amenities and crops. This analysis is conducted using a general two goods model where all agricultural land is used for production. The regulation authority can regulate these goods either through set aside requirements or production quotas. The paper focuses on information asymmetry about some farm performance index creating adverse selection. When public funds are non costly we show that the net social welfare induced by the two types of contracts are equal. In general we also show that if the goal of the regulation is to decrease the production of the quota good it is better to use the quota contract. On contrary if the regulation aims at increasing the production of the quota good, it is better to use a set aside contract.

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 Record created 2017-04-01, last modified 2019-08-26

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