Tough Love: Optimal Enforcement of Output Quotas in the Presence of Cheating

This study builds on the literature on the economics of output quotas in the presence of cheating. We extend previous work by Giannakas and Fulton (2000a) by examining the decisions of the agency responsible for the enforcement of output quotas in a decentralized policy-making structure. Enforcement policy design is modeled as a sequential game between the agency that determines the enforcement of the quota program (designed by a regulator), and farmers who make production decisions. Analytical results show that the level of enforcement depends on the size of the enforcement costs and the political preferences of the enforcement agency - the greater is the weight placed by the enforcement agency on producer welfare, the greater is the level of program enforcement.