(agri)Environmental contracts, dynamic inconsistencies and moral hazard

Abstract: From the beginning of the world, the agricultural sector has always played an essential role into our society, and contracts have massively been used by policy-makers for the implementation of (agri)environmental policies, especially when such policies concern the use and development of privately owned land, and information asymmetries between policy-makers and individuals exist. Even though the majority of (agri)environmental contracts are designed assuming individual’s constant time-preferences, recent evidence from many behavioural studies on individual’s intertemporal choices advocate declining time-preferences due to behavioural biases, which can be explained by hyperbolic discounting. Therefore, in this dissertation we present a theoretical analysis of the impact of an intertemporal time-inconsistent individual into a contract for the provision of an (agri)environmental target, under both perfect and imperfect information. Our key finding suggests that the more inconsistent time-preferences an individual has, the higher the impact of them into contract design is, unless a commitment mechanism (perfect information) or higher detection probability of cheaters (imperfect information) is feasible. We also found that the duration of the contract has a significant impact into it, only in cases where individuals know precisely (i.e. they have sophisticated beliefs) how inconsistent their time-preferences are.