Empirical Calibration of a Least-Cost Conservation Reserve Program



The optimal second-best policy is slightly more complicated. Without loss of general-
ity, I appeal to the Revelation Principle and restrict attention to direct revelation mechanisms
satisfying incentive compatability (see Myerson, 1979):

∈ arg max
θ


for all θ^,^ ∈ Θ2.


(21)


This requirement, combined with the participation constraint (15), imposes two restrictions
on the set of feasible contract allocations (both follow directly from results in Baron and
Myerson (1982)). First, for an interior solution, a truthful mechanism requires that land use
be monotonically non-decreasing in type:

a0 (θ) ≥ 0.

(22)


Second, a truthful mechanism requires the change in expected surplus over type be decreasing
at the rate

s0 (θ) = πθ (a (θ) , θ) — πθ (a, θ).

(23)


Since surplus is decreasing, the best the principal can do while satisfying (15) and

(23) is to set s (θŋ = 0. Using Eq. (23), surplus is then a function of land allocations:

(θ)=θ


πθ (a (ω) ,ω)


— πθ (a, ω) dω.


(24)


Temporarily ignoring (22), substitution of Eq. (24) into Eq. (16) and integrating by parts

14



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