Incentive-compatible targeting for the provision of public goods in agriculture

Targeting is advocated as one of the main strategies to improve effectiveness of environmental policies. Among others, this is very relevant for EU agri-environmental schemes (AESs) through which payments are provided to farmers for the provision of environmental goods. Targeting requires support by way of appropriate knowledge systems and zoning, as well as the definition of priorities for funding when subsidies are involved. However, targeting often fails due to a lack of consideration of the economic incentives to participate in target areas. This is partly motivated by the fact that agents have private information on their compliance costs which is undisclosed to the regulator. The objective of this paper is to design a model of incentive compatible targeting strategies under asymmetric information. The model is then used to evaluate the impact of targeting strategies on designing agri-environmental contracts under adverse selection in different agricultural policy scenarios. The results suggest that targeting choices directly affect the optimal way contracts are designed and that this should be considered in the policy design process in order to avoid a failure of the targeting mechanisms. In the case analysed, different agricultural policy scenarios can significantly affect AES policy design.