How to organise nature production by farmers

When farmers contract to produce 'nature', they act as agents to the government's principal. Principal-agent theory provides a comprehensive analytical framework for studying this relationship. The principal and agent must cope with uncertainty and asymmetrical and imperfect information, and therefore transactions may take place under adverse selection and moral hazard. The farmers' uncertainty relates to the contract and the government's inconsistency over time. Also important is their attitude to risk. A participation bonus can motivate farmers to reveal their real costs. Truth-telling creates a Nash equilibrium. Farmers can anticipate the uncertainties of government time inconsistencies by adopting a more risk-averse position.