Transaction Costs in Agri-environmental Schemes: the Principal-agent-point of View

Agri-environmental schemes provide payments for farmers in return for environmental services. Their implementation induces transaction costs for administration and farmers. Although transaction costs became subject of research in recent years, little attention has been paid to activities which create them. This paper uses insights from Principal-Agent-Theory to show, how information gaps between contracting partners result in tradeoffs inducing activities conducted at implementation level. A Grassland Extensification Scheme, provided in Hesse, Germany, serves as a case-study. The paper shows that attempts and incentives to overcome informational gaps are different for administration and farmer. Further, attempts to reduce transaction costs of own activities may have spillover effects on the transaction costs of the contracting partner and along the transaction process. Those effects should be taken into account in discussions on scheme evaluation and development.