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Optimal Regulation Under Asymmetric Information And Risk Aversion With An Application To Pollution Control

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  • Bontems, Philippe
  • Thomas, Alban

Abstract

We consider a general model of regulation for a risk-averse agent who observes her private-information parameter after the contract is signed. The latter specifies a quota for input used in production, whose decomposition among different production stages is unknown to the regulator. We characterize the optimal solution to the regulator problem, under general assumptions on net expected social surplus and the agent utility function. We apply the model to the case of pollution control by an environmental agency, where the agent is a risk-averse farmer facing production risk because of nitrogen leaching, and the private-information parameter measures the soil capacity in retaining nitrogen. The farmer sequential decision model is estimated on French crop production data and the results are then used to calibrate and simulate the optimal contract.

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Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2001 Annual meeting, August 5-8, Chicago, IL with number 20727.

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Date of creation: 2001
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Handle: RePEc:ags:aaea01:20727

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Keywords: Environmental Economics and Policy;

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  1. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
  2. Chavas, Jean-Paul & Holt, Matthew T, 1996. "Economic Behavior under Uncertainty: A Joint Analysis of Risk Preferences and Technology," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 329-35, May.
  3. Lambert, David K., 1990. "Risk Considerations In The Reduction Of Nitrogen Fertilizer Use In Agricultural Production," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 15(02), December.
  4. Bruce A. Babcock & David A. Hennessy, 1996. "Input Demand under Yield and Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 416-427.
  5. Thomas, Alban & Bontems, Philippe, 1998. "Information Value And Risk Premium In Agricultural Production Under Risk: The Case Of Split Nitrogen Application For Corn," 1998 Annual meeting, August 2-5, Salt Lake City, UT 20844, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  6. Babcock, Bruce A., 1992. "Effects of Uncertainty on Optimal Nitrogen Applications (The)," Staff General Research Papers 10588, Iowa State University, Department of Economics.
  7. Philippe Bontems & Alban Thomas, 2000. "Information Value and Risk Premium in Agricultural Production: The Case of Split Nitrogen Application for Corn," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(1), pages 59-70.
  8. Laffont, Jean-Jacques & Rochet, Jean-Charles, 1998. "Regulation of a Risk Averse Firm," Games and Economic Behavior, Elsevier, vol. 25(2), pages 149-173, November.
  9. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September.
  10. Feinerman, Eli & Choi, E. Kwan & Johnson, Stanley R., 1990. "Uncertainty and Split Nitrogen Application in Corn Production," Staff General Research Papers 10598, Iowa State University, Department of Economics.
  11. Chavas, Jean-Paul & Kristjanson, Patricia M. & Matlon, Peter, 1991. "On the role of information in decision making : The case of sorghum yield in Burkina Faso," Journal of Development Economics, Elsevier, vol. 35(2), pages 261-280, April.
  12. Feinerman, Eli & Kwan, E. & Johnson, Stanley R., 1990. "Uncertainty and Split Nitrogen Application in Corn Production," Staff General Research Papers 328, Iowa State University, Department of Economics.
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