This article proposes a method to accommodate asymmetric information on farmers' risk preferences in designing voluntary environmental policies. By incorporating stochastic efficiency rules in a mechanism design problem, the government can find incentive-compatible policies by knowing only the general class of risk preferences among farmers. The model also accounts for hidden information on technology types and input use. The method is applied empirically to simulate a pollution control program in New York. Results suggest that participation incentives would be inadequate for many risk-averse producers if the government does not account for the diversity in risk preferences.
Bibliographical noteFunding Information:
Comments from Loren Tauer and two anonymous reviewers are gratefully acknowledged. This research was supported in part by the Cornell University Agricultural Experiment Station federal formula funds, Projects NYC-121444 and 121490, received from Cooperative State Research, Education, and Extension Service, U.S. Department of Agriculture. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the authors and do not necessarily reflect the view of the U.S. Department of Agriculture. Additional funding was provided by USDA-ERS Cooperative Agreement 43-3-AEM-2-800900 and Hatch Project NY(C) 121444.
- Asymmetric information
- Mechanism design
- Nonpoint pollution
- Risk preferences