Theory of Contracts and Agri-Environment Policies: A Budget Restriction Alters Standard Results of Mechanisms Design Theory

Agri-environmental schemes are offered by a regulator to farmers. The farmer is to produce certain environmental goods and gets a pecuniary compensation for doing so. The problem of designing optimal schemes is dealt with using mechanisms design theory. This paper considers the situation where the regulator faces a budget constraint on total payments to farmers. It is shown, that 2 results of standard mechanisms design theory are affected when a budget restriction on total payments is present. 1) The "no distortion at the top rule" does not always hold. 2) It is not always optimal to offer heterogeneous farmers heterogeneous argi-environmental schemes