Efficient Exertion of the Multifunctionality of Agriculture by Voluntary Approaches

Abstract

This paper applies a contract theory to examine whether the voluntary approach, which has recently attracted attention as one of the environmental control policies, is efficient for the exertion of the multifunctionality of agriculture. The conclusions obtained through the analysis are the following four points.
1. In voluntary approaches, when it is socially costly to collect the subsidy, first best solutions cannot be achieved.
2. In voluntary approaches, optimal menus obtained when only participation constraints are imposed cannot be implemented, because optimal menus for each type cannot be compelled. Therefore, even if farmers' types can be observed, incentive compatible constraints need to be imposed.
3. When the probability distribution of the net marginal cost holds to the monotone hazard rate condition, as the net marginal cost of farmers or the social cost to collect the subsidy decreases, optimal levels in voluntary agreements increase. Furthermore, when the social cost to collect the subsidy is zero, first best solutions can be achieved.
4. When the net marginal costs or the social cost to collect the subsidy is so high, non-participation is optimal.