Costly (Dis)Agreement: Optimal Intervention, Income Redistribution, and Transfer Efficiency of Output Quotas in the Presence of Cheating

This study builds on previous work by Giannakas and Fulton (2003, 2000) on the economics of output quotas in the presence of cheating by examining the efficiency of the policy in transferring income to producers as well as the optimal regulatory response to enforcement costs and farmer noncompliant behavior in a decentralized policy making environment. Analytical results show that enforcement costs and cheating change the transfer efficiency of output quotas, the level of intervention that transfers a given surplus to producers, the socially optimal income redistribution, and the social welfare from intervention. The incidence of the policy is shown to depend on the relative political preferences of the policy makers and the policy enforcers making the consideration of the decentralized policy making structure critical in analyzing output quotas in the presence of cheating.