Epsilon Archive for Student Projects

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.