Empirical Calibration of a Least-Cost Conservation Reserve Program

yields the following Lagrangian for the government’s second-best problem:

= F (F^(^θ)[∏θ (a, θ) - ∏θ (a (θ), θ)] - ∏ (a (θ), θ) + ∏ (a, θ) T dF (θ) +   (25)

_Θ f (θ)

—λ ʃ [a — a (θ) — A] dF (θ) — y μ (θ) [a — a (θ)] dθ.

Consequently, an optimal second-best land allocation satisfies the following conditions:

The properties of F (θ) and π (a (θ) ,θ) ensure that this solution satisfies (22) (see Guesnerie
and Laffont, 1984). The impact of asymmetric information can be easily seen for interior
solutions. Unlike the first-best case, rather than having the marginal profit of land be
equated for all farms, there is a distortion created by the term F (θ) π_αθ/f (θ). As a result,
the equimarginal principal is never satisfied. This program could be implemented by the
government requesting that producers choose a land allocation and total transfer payment
from a menu of possible choices. For an interior solution, such a scheme would not result in
a linear price per acre of land idled.

The Pigouvian subsidy program can be thought of as a hybrid of the first and second
best programs. With this program, the transfer is ta (θ) rather than t (θ). The first order
condition of incentive compatibility condition (21) requires that an interior solution satisfy:

πα (a (θ) ,θ)=t.

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