Moral Hazard, Targeting and Contract Duration in Agri-Environmental Policy

This article extends the multi-period agri-environmental contract model of Fraser (Journal of Agricultural Economics, Vol. 55, (2004) pp. 525–540) to include a more realistic specification of the inter-temporal penalties for non-compliance, and therefore of the inter-temporal moral hazard problem in agri-environmental policy design. It is shown that a farmer has an unambiguous preference for cheating early over cheating late in the contract period based on differences in the expected cost of compliance. It is then shown how the principal can make use of this unambiguous preference to target monitoring resources intertemporally, and in so doing, to encourage full contract duration compliance.