On the Use of Targeting to Reduce Moral Hazard in Agri‐environmental Schemes

Abstract

This paper investigates the role of targeting in the context of agri‐environmental schemes involving monitoring and penalties. By separating participants into a target and a nontarget group the aim of targeting is to reduce the moral hazard problem. The paper analyses three approaches to targeting which have different implications for the level of monitoring resources and the focus is on reducing the extent of cheating by participants in the nontarget group. By complementing the adoption of targeting with appropriate adjustments to the monitoring/penalty parameters, it is shown how such an approach can exploit the risk aversion of participants to completely eliminate cheating by those participants in the nontarget group. The implementation of such a system of targeting is discussed in the context of existing agri‐environmental policies.