Optimal Design of a Voluntary Green Payment Program Under Asymmetric Information

Green payment programs, where the government pays farmers directly for environmental benefits, have been proposed as an alternative to the current method of achieving environmental benefits by restricting farming practices in exchange for deficiency payments. This paper presents a voluntary green payment program using the principles of mechanism design under asymmetric information. The information asymmetry arises because government knows only the distribution of individual farmers' production situations, rather than farm-specific information. The program is applied to irrigated corn production in the Oklahoma Panhandle, where nitrogen fertilizer is a nonpoint source of pollution. We demonstrate empirically that a green payment program can increase farm income, decrease pollution, and increase the net social value of corn production relative to current deficiency payment programs.