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An Incentive Compatible Self-Compliant Pollution Policy and Asymmetric Information on Both Risk Attitudes and Technology

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  • Patterson, Jeffrey M.
  • Boisvert, Richard N.
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    Abstract

    This paper develops an incentive compatible policy to control agricultural pollution, where the government knows the ranges of technology types and risk attitudes but not their distributions across farmers. The policy creates incentives for farmers to participate in the program, but includes constraints to ensure both self-selection of the appropriate policy, and self-compliance with the policy selected. Unknown risk attitudes are accommodated through stochastic efficiency rules. The model is applied empirically to estimate policies to limit nitrate contamination from New York agriculture. The estimated cost of such a program is not large compared to past commodity policies. Payments could be reduced if soils information is used to assign policies. Self-compliance is possible and does not impose a large cost on the government. If the policy were designed under risk neutrality, payments would be substantially below the incentive needed for participation by a risk averse farmer.

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    File URL: http://purl.umn.edu/127318
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    Bibliographic Info

    Paper provided by Cornell University, Department of Applied Economics and Management in its series Working Papers with number 127318.

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    Date of creation: Oct 2002
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    Handle: RePEc:ags:cudawp:127318

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    Keywords: Environmental Economics and Policy; Risk and Uncertainty;

    References

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    1. Wu, JunJie & Babcock, Bruce A., 1995. "Optimal Design of a Voluntary Green Payment Program Under Asymmetric Information," Staff General Research Papers 843, Iowa State University, Department of Economics.
    2. Boisvert, Richard N. & Peterson, Jeffrey M., 2001. "Control Of Nonpoint Source Pollution Through Voluntary Incentive-Based Policies: An Application To Nitrate Contamination In New York," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 30(2), October.
    3. Pannell, David J. & Malcolm, Bill & Kingwell, Ross S., 2000. "Are we risking too much? Perspectives on risk in farm modelling," Agricultural Economics, Blackwell, vol. 23(1), pages 69-78, June.
    4. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, October.
    5. Wu, JunJie & Babcock, Bruce A., 1996. "Contract Design for the Purchase of Environmental Goods from Agriculture," Staff General Research Papers 1050, Iowa State University, Department of Economics.
    6. Murat Isik, 2002. "Resource Management under Production and Output Price Uncertainty: Implications for Environmental Policy," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(3), pages 557-571.
    7. Peterson, Jeffrey M. & Boisvert, Richard N., 2001. "Designing Nonpoint Source Pollution Policies With Limited Information About Both Risk Attitudes And Production Technology," 2001 Annual meeting, August 5-8, Chicago, IL 20720, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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