Empirical Calibration of a Least-Cost Conservation Reserve Program

this information. The estimated technological parameters of the cost function can be used
to generate a parametric profit function for each type. In addition, the estimate σθ can be
used to obtain a probability density function of producer types.

III. Alternative Environmental Contracts

The environmental policies examined here are three stylized versions of the CRP. In
all three versions, the program has two salient features. First, the government must ensure
that the sector idles a targeted quantity of land. Second, the program must be voluntary.⁷
The task of the government is to design a policy mechanism for allocating land and transfer
payments such that these conditions are satisfied at least cost to taxpayers.

The three versions of the program differ in additional constraints faced by the gov-
ernment. In the least constrained “first-best” case, the government has full information
regarding producer types, and can directly use this information to design contracts. In the
“second-best” case, the government cannot observe type, but can offer producers different
per-acre payments depending on the quantity of land enrolled in the program. In the final
“Pigouvian subsidy” case, the government cannot observe type nor can it price discriminate
among producers. Instead, it can only offer a linear payment per unit of land retired. The
difference in cost between the first and second best programs provides an upper bound on
the value of actions designed to overcome the information asymmetry. The difference be-
tween the second best and Pigouvian programs indicates the maximum benefits obtainable
by redesigning the program itself, without obtaining new information.

The variables a (θ) and t (θ) denote the terms of a contract for type θ, where a (θ)
is the amount of land cultivated and t (θ) is the transfer. Suppressing price arguments, the
market profit function π (a (θ) ,θ), completely characterizes the production technology. All

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