Therefore, like the first-best program, for an interior solution the Pigouvian land allocation
scheme equates marginal profit of land across producers. Moreover, in order to satisfy the
environmental constraint (12), this land allocation must be exactly the same as for the
first-best program. It is like the second-best program, however, in the sense that Eq. (23)
must still be satisfied. With asymmetric information, the government cannot recover surplus
payments from producers. The best it can do is ensure that the highest participating type
receives zero surplus.
IV. Policy Simulations
Using the structural parameters estimated in Section II and the theoretical results
from Section III, one can empirically characterize the three programs in terms of amount
of land idled and transfer received by each type. In this section, I conduct simulations to
evaluate two policy decisions. The first is the value of removing the information asymmetry.
Suppose type were completely embodied in a measurable soil quality index. By comparing
the cost of the first and second best mechanisms, we obtain the maximum amount the
government should be willing to pay to collect the soil quality information. The second
policy decision involves the value of policy reform. Revising policy inherently involves some
degree of transition cost. By comparing the second-best program with the optimal linear-
price program mechanism, we obtain the maximum amount the government should be willing
to incur to develop an optimal policy without collecting additional information.
For purposes of the simulation, the profit function is defined as the average of π (a, θ)
given prices of the four year period 1997-2000. Since about 5 percent of cropland in the
Heartland region participates in the CRP, the expected land set aside target A is set to
100 acres for the 2,000-acre farms.9 The lower bound of ln θ with a half-normal distribution
16