Hidden action, risk aversion and variable fines in agri-environmental schemes <link rid="fn1">*</link>

This note analyses the design of agri-environmental schemes for risk-averse producers whose input usage is only observable by costly monitoring. The scheme penalises producers in proportion to input use in excess of a quota. A striking result is that if the scheme is designed in such a way that producers always comply with the quota, risk aversion is not relevant in determining the level of input use. Copyright 2008 The Authors. Journal compilation 2008 Australian Agricultural and Resource Economics Society Inc. and Blackwell Publishing Asia Pty Ltd.