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Abstract
This paper theoretically investigates the joint and endogenous determination of both production and agri‐ environmental transfers in developed countries' agriculture. While agri‐environmental regulation is motivated by market failures in the delivery of environmental benefits (soil cover, landscapes, pollution abatement, and so on), production support may only be due to political interests. We then explore how both policy instruments interact and how political economic factors—namely farmers' special interest groups, inequality aversion, and partial concerns for environmental amenities—induce deviation from first‐best and second‐best policies. More inequality‐averse and more amenity‐oriented policy‐makers, as well as social and cultural differences in citizens' preferences for agricultural landscapes between the EU and the US, can explain differences in support levels, trends, and composition. This also supports the evidence that agri‐ environmental regulation is more effective and individual‐specific in the US than in the EU. Finally, we conclude that future WTO negotiations and policy reforms can partially restore efficiency