IDEAS home Printed from https://ideas.repec.org/p/ags/aaea01/20727.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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.

Suggested Citation

  • Bontems, Philippe & Thomas, Alban, 2001. "Optimal Regulation Under Asymmetric Information And Risk Aversion With An Application To Pollution Control," 2001 Annual meeting, August 5-8, Chicago, IL 20727, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea01:20727
    DOI: 10.22004/ag.econ.20727
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/20727/files/sp01bo02.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.20727?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Atanu Saha & C. Richard Shumway & Hovav Talpaz, 1994. "Joint Estimation of Risk Preference Structure and Technology Using Expo-Power Utility," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(2), pages 173-184.
    2. Huang, Wen-Yuan & Uri, Noel D. & Hansen, LeRoy, 1994. "Timing Nitrogen Fertilizer Applications To Improve Water Quality," Staff Reports 278735, United States Department of Agriculture, Economic Research Service.
    3. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-1367, November.
    4. Hans P. Binswanger, 1980. "Attitudes Toward Risk: Experimental Measurement in Rural India," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 62(3), pages 395-407.
    5. Eli Feinerman & E. Kwan Choi & Stanley R. Johnson, 1990. "Uncertainty and Split Nitrogen Application in Corn Production," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 72(4), pages 975-985.
    6. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-1190, September.
    7. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    8. Bruce A. Babcock, 1992. "The Effects of Uncertainty on Optimal Nitrogen Applications," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 14(2), pages 271-280.
    9. 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.
    10. Howard D. Leathers & John C. Quiggin, 1991. "Interactions between Agricultural and Resource Policy: The Importance of Attitudes toward Risk," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(3), pages 757-764.
    11. 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.
    12. H. Alan Love & Steven T. Buccola, 1991. "Joint Risk Preference-Technology Estimation with a Primal System," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(3), pages 765-774.
    13. 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.
    14. 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.
    15. Feinerman, Eli & Kwan, E. & Johnson, Stanley R., 1990. "Uncertainty and Split Nitrogen Application in Corn Production," Staff General Research Papers Archive 328, Iowa State University, Department of Economics.
    16. David P. Baron & David Besanko, 1987. "Monitoring, Moral Hazard, Asymmetric Information, and Risk Sharing in Procurement Contracting," RAND Journal of Economics, The RAND Corporation, vol. 18(4), pages 509-532, Winter.
    17. Feinerman, Eli & Choi, E. Kwan & Johnson, Stanley R., 1990. "Uncertainty and Split Nitrogen Application in Corn Production," Staff General Research Papers Archive 10598, Iowa State University, Department of Economics.
    18. 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 329-335, May.
    19. 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).
    20. Bernard Salanié, 1990. "Sélection adverse et aversion pour le risque," Annals of Economics and Statistics, GENES, issue 18, pages 131-149.
    21. 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(2), pages 1-11, December.
    22. 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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gomez-Limon, Jose A. & Arriaza, Manuel & Riesgo, Laura, 2003. "An MCDM analysis of agricultural risk aversion," European Journal of Operational Research, Elsevier, vol. 151(3), pages 569-585, December.
    2. Gomez-Limon, Jose Antonio & Riesgo, Laura & Arriaza Balmón, Manuel, 2002. "Agricultural Risk Aversion Revisited: A Multicriteria Decision-Making Approach," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 24827, European Association of Agricultural Economists.
    3. Murat Isik & Madhu Khanna, 2003. "Stochastic Technology, Risk Preferences, and Adoption of Site-Specific Technologies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(2), pages 305-317.
    4. Camille Tevenart & Marielle Brunette, 2021. "Role of Farmers’ Risk and Ambiguity Preferences on Fertilization Decisions: An Experiment," Sustainability, MDPI, vol. 13(17), pages 1-27, August.
    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. Nicolás Hernández Santibáñez & Dylan Possamaï & Chao Zhou, 2020. "Bank monitoring incentives under moral hazard and adverse selection," Post-Print hal-01435460, HAL.
    7. Lichtenberg, Erik, 2002. "Agriculture and the environment," Handbook of Agricultural Economics, in: B. L. Gardner & G. C. Rausser (ed.), Handbook of Agricultural Economics, edition 1, volume 2, chapter 23, pages 1249-1313, Elsevier.
    8. Jisang Yu & Nathan P. Hendricks, 2020. "Input Use Decisions with Greater Information on Crop Conditions: Implications for Insurance Moral Hazard and the Environment," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(3), pages 826-845, May.
    9. Nicol'as Hern'andez Santib'a~nez & Dylan Possamai & Chao Zhou, 2017. "Bank monitoring incentives under moral hazard and adverse selection," Papers 1701.05864, arXiv.org, revised Jan 2019.
    10. Philippe Bontems & Celine Nauges, 2019. "Production choices with water markets and risk aversion: the role of initial allocations and forward trading," Post-Print hal-02349932, HAL.
    11. Vercammen, James & Gulati, Sumeet & Anda, Mario, 2004. "Government Taxation Schemes to Reduce Fertilizer Runoff," Annual Meeting, 2004, June 20-23, Halifax, Nova Scotia 34195, Canadian Agricultural Economics Society.
    12. Nurmakhanova, Mira, 2008. "Essays on fall fertilizer application," ISU General Staff Papers 2008010108000016739, Iowa State University, Department of Economics.
    13. Nicolás Hernández Santibáñez & Dylan Possamaï & Chao Zhou, 2020. "Bank Monitoring Incentives Under Moral Hazard and Adverse Selection," Journal of Optimization Theory and Applications, Springer, vol. 184(3), pages 988-1035, March.
    14. Benjamin Dequiedt & Emmanuel Servonnat, 2016. "Risk as a limit or an opportunity to mitigate GHG emissions? The case of fertilisation in agriculture," Working Papers 1606, Chaire Economie du climat.
    15. Nakashima, Takahiro, 2006. "Linear Structural Models of Production under Price Uncertainty: A Mean-Standard Deviation Approach," Japanese Journal of Agricultural Economics (formerly Japanese Journal of Rural Economics), Agricultural Economics Society of Japan (AESJ), vol. 8, pages 1-11.
    16. Mitchell, Paul David, 1999. "The theory and practice of green insurance: insurance to encourage the adoption of corn rootworm IPM," ISU General Staff Papers 1999010108000013154, Iowa State University, Department of Economics.
    17. Karagiannis, Giannis, 1999. "Proportional Profit Taxes And Resource Management Under Production Uncertainty," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(2), pages 1-11, December.
    18. Shankar, Bhavani & Nelson, Carl H. & Braden, John B., 1998. "Stochastic Technology, Risk Preferences, And The Use Of Polluting Inputs," 1998 Annual meeting, August 2-5, Salt Lake City, UT 21011, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    19. Eli Feinerman & Marinus Komen, 2005. "The Use of Organic vs. Chemical Fertilizer with a Mineral Losses Tax: The Case of Dutch Arable Farmers," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 32(3), pages 367-388, November.
    20. Babcock, Bruce A. & Blackmer, Alfred M., 1992. "The Value Of Reducing Temporal Input Nonuniformities," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(2), pages 1-13, December.

    More about this item

    Keywords

    Environmental Economics and Policy;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:aaea01:20727. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: https://edirc.repec.org/data/aaeaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.