Regulating Nitrogen Pollution with Risk Averse Farmers Under Hidden Information and Moral Hazard

16 Pages Posted: 22 Apr 2020

See all articles by Philippe Bontems

Philippe Bontems

French National Institute for Agricultural Research (INRA)

Alban Thomas

University of Toulouse 1 - Toulouse School of Economics (TSE); delete

Date Written: February 2006

Abstract

We consider a model of pollution regulation for a risk averse farmer involving hidden information, moral hazard, and risk‐sharing. The representative farmer faces a production risk originating from nitrogen leaching, and privately observes the soil capacity in retaining nitrogen only after the regulation contract is signed. The latter specifies a transfer and a nitrogen quota, whose decomposition by the farmer among different production stages is unknown to the regulator. We first characterize the optimal solution to the regulator's problem. The sequential decision model is estimated on French crop production data, and the results are used to calibrate and simulate the optimal contract.

Keywords: asymmetric information, mechanism design, moral hazard, nonpoint source pollution, risk aversion, split nitrogen application

Suggested Citation

Bontems, Philippe and Thomas, Alban and Thomas, Alban, Regulating Nitrogen Pollution with Risk Averse Farmers Under Hidden Information and Moral Hazard (February 2006). American Journal of Agricultural Economics, Vol. 88, Issue 1, pp. 57-72, 2006, Available at SSRN: https://ssrn.com/abstract=3581936 or http://dx.doi.org/10.1111/j.1467-8276.2006.00838.x

Philippe Bontems (Contact Author)

French National Institute for Agricultural Research (INRA)

147, rue de l'Universite
Paris Cedex 07, 78-Yvelines 75338
France

Alban Thomas

delete

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

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