Regulatory Policy Design for Agroecosystem Management on Public Rangelands

This paper analyzes regulatory design for agroecosystem management on public rangelands. We present an informational and institutional environment where three of the most prominent regulatory instruments on public rangelands – input regulation, cost-sharing/taxation, and performance regulation – can be defined and compared. The paper examines how the optimal regulation is shaped by the informational and institutional constraints faced by federal land management agencies (FLMAs) such as the Bureau of Land Management and the U.S. Forest Service. These constraints include informational asymmetries between ranchers and FLMAs, limitations on FLMAs’ ability to monitor ranch-level ecological conditions, and constraints on FLMAs’ actions due to budget limitations and restrictions on the level of penalties they can assess. The theoretical model extends the previous work of Baker (1992), Prendergast (2002), and Hueth and Melkonyan (2009) by considering optimal regulation by a budget-constrained regulator in an environment of asymmetric information and moral hazard. JEL Classification: D86, Q18, Q20