Modelling the Linkages between Cross-Compliance and Agri-Environmental Schemes Under Asymmetric Information

Agri-environmental schemes (AESs) and cross-compliance (CC) are the two main components of the common agricultural policy (CAP) that address environmental issues. Under regulation 1698/2005, agri-environmental scheme design has been established in such a way as to use CC as the baseline against which prescriptions and payments are identified. In this framework, agri-environmental payments to farmers are justified only for the component of public goods produced (if any) above the CC prescription level. This constraint has become a major determinant of the design of agri-environmental schemes in all EU Member States in which both instruments are implemented. This paper investigates farmer participation, compliance choices and the socially optimal level of monitoring when CC and agri-environmental schemes are jointly considered, and when information about compliance is asymmetrically distributed between farmers and the public regulator. The results show that the two policy instruments interact with each other, with agri-environmental payments actually providing incentives for CC, when the CC monitoring and sanction system does not guarantee full compliance. However, the numerical example in Emilia-Romagna (Italy) demonstrates that with the present combination of controls and sanctions, farmers have very little incentive to be compliant with both cross compliance and agri-environmental schemes. Hence, the results highlight that monitoring in CC or in AES does not have the same effect on the farmers compliance. This underscores the need for further research in this field, particularly as provision of environmental goods becomes more important in the future CAP.