Contracting for Non - Point - Source Pollution Abatement

This paper presents an incentive scheme to control agricultural non-point-source pollution. The analysis is based on a nested agent framework with three parties; farmers, a country’s government, and the governments of all countries that affect each other’s environmental quality. Unlike previous analysis of incentive schemes to control agricultural pollution, we suggest non-individual contracts between farmers and a regulating authority as a solution to the domestic pollution problem. Our incentive scheme proposes collective penalties as a way to control pollution. To solve the international problem of pollution management of a common (water) resource, we propose an international agency with authority to write and enforce contracts in each of its member countries. We show that the information requirement on a country’s government can be substantially reduced if contracts can be made non-individual. ✠ Olof Byström is a research assistant at the Department of Economics, Swedish University of Agricultural Sciences and a Visiting Scholar at the Department of Agricultural Economics University of Wisconsin, Madison. Daniel W Bromley is a professor at the Department of Agricultural Economics, University of Wisconsin, Madison. This research was funded by the Swedish Council for Forestry and Agricultural Research.