Optimal Design of Cross-Compliance Under Asymmetric Information

The benefits of cross-compliance can be maximised only by taking into account the trade-off between economic costs due to cross-compliance prescriptions and environmental benefits produced. Both can, however, be strongly differentiated between different areas/farms. In addition, the effects of cross-compliance are conditioned by the ability to design appropriate incentives to compliance for farmers. The objective of this paper is to develop a framework for the analysis of cross-compliance under asymmetric information when the differentiation of the compliance cost function is explicitly taken into account. This is accomplished by the development from the public regulator of a mathematical model of optimal cross-compliance design under asymmetric information about compliance. The methodology is applied to a case study represented by the municipality of Argenta in Emilia-Romagna Region (Italy). Empirical insights show the potential loss of net social benefits from cross-compliance when undifferentiated policies are implemented in cases with relevant differences in the value of costs of compliance. The analysis demonstrates that when the net social benefits of prescription have differentiated values, optimal policy design requires a differentiation of prescriptions and monitoring intensity. This is primarily addressed in this paper through the consideration of differentiated compliance costs. However, the same would apply to provide appropriate incentives to farmers, taking into account differentiated environmental benefits produced and Single Farm Payment endowments.