Compliance monitoring and agri-environmental policy

This paper examines the issue of compliance monitoring agri-environmental p olicy when a farmer is risk-neutral and risk-averse. The optimal contract m odel presented here significantly extends and generalises the results and c onclusions of Choe and Fraser (1998). In this paper the environmental agenc y explicitly chooses monitoring accuracy and monitoring costs as well as re wards for farmers. It is found that, by modelling the environmental agency as being cost-conscious optimal monitoring accuracy may or may not be highe r for a risk-averse farmer than for a risk-neutral farmer Essentially, the environmental agency faces art explicit trade-off between monitoring costs and incentive payments as a means to ensure the desired behaviour from the farmer The importance of the results derived are discussed in the context o f agri-environmental policy design and implementation.