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Moral Hazard and Risk Management in Agri‐environmental Policy
Author(s) -
Fraser Rob
Publication year - 2002
Publication title -
journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.157
H-Index - 61
eISSN - 1477-9552
pISSN - 0021-857X
DOI - 10.1111/j.1477-9552.2002.tb00033.x
Subject(s) - moral hazard , variance (accounting) , risk aversion (psychology) , risk management , hogan , economics , hazard , european union , control (management) , principal (computer security) , compliance (psychology) , margin (machine learning) , business , public economics , actuarial science , incentive , expected utility hypothesis , microeconomics , finance , economic policy , computer science , psychology , social psychology , chemistry , accounting , mathematical economics , organic chemistry , management , machine learning , sociology , anthropology , operating system
This paper develops the key finding of Ozanne, Hogan and Colman (2001) that risk aversion among farmers ameliorates the moral hazard problem in relation to agrienvironmental policy compliance. It is shown that risk averse farmers who face uncertainty in their production income are more likely to comply with such a policy as a means of risk management. In addition, it is shown that a principal who has control over both the level of monitoring and the size of penalty, if detected, can reduce non‐compliance by adjustments to these instruments which increase the variance of farmers' income but leave the expected penalty unchanged. It is concluded that risk management by both principals and agents has the potential to diminish the moral hazard problem, especially given proposed developments in agri‐environmental policy in the European Union.