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Abstract
Moxey, White and Ozanne (1999) have shown how transfer payments coupled with input quotas
can be used to design optimal truth-telling mechanisms for voluntary agri-environmental
schemes under hidden information about compliance costs. Ozanne, Hogan and Colman (2001)
adapted the Moxey et al. model to analyze hidden action in such schemes, analyzing the
relationships between input abatement, the cost of monitoring compliance and farmers’ risk
preferences. White (2002) extended the Moxey et al. model to analyze the design of contracts
under both hidden action and hidden information, but used an input charge/transfer payment
approach rather than the original input quota/transfer payment one. In addition, he assumed
that farmers caught cheating face a variable fine, related to the amount of input they apply in
excess of the amount agreed in the contract, rather than a fixed fine as assumed by Ozanne et al.
White argues that his results show that an input charge/transfer payment policy is more efficient
than a quota when the regulator cannot observe compliance costs of individual farmers. This
paper integrates the previous work, developing a model of both hidden action and hidden
information in agri-environmental schemes based on the input quota/transfer payment approach
of Moxey et al. (1999) and Ozanne et al. (2001), rather than the input charge/transfer payment
approach of White (2002), but the variable fine of the latter rather than the fixed fine assumed by
Ozanne et al. This integrated model shows that, contrary to White (2002), the input quota and
input charges approaches lead to identical outcomes in terms of abatement levels, compensation
payments, monitoring costs, probabilities and social welfare.