Acceptable reforms of agri-environmental policies

Abstract

We consider a model of regulation for nonpoint source water pollution where farmers are heterogenous along two dimensions, their ability to transform inputs into final production and the productive land they possess. Regulation takes place through non linear taxation/subsidization of agricultural production and land, in the presence of asymmetric information about ability to produce. We also introduce a political acceptability constraint implying that the regulation has to be optimally designed taking into account the distribution of incomes in the pre-reform situation. We show that the optimal reform essentially amounts to reallocate production towards less efficient farmers, who benefit from the reform at the expense of more efficient producers. Importantly, incentive compatibility requirement puts some strong restrictions on the way production should be allocated in the agricultural sector and thereby, contrary to what happens under perfect information, it allows to get some clear-cut results on who is over-compensated or under-compensated by the optimal regulatory reform. Last, we calibrate the model using data on a french watershed (Don watershed). Simulations indicate that, on our exemple, satisfying a high degree of acceptability may not entail high welfare losses compared to lower degrees of political sustainability. A low size farm has a higher probability of being a reform winner than a large farm, even though the regulator has no specific redistribution concern towards small farms.