Empirical Calibration of a Least-Cost Conservation Reserve Program

policy is a mix of the three. Producer types are unobservable, but the government uses soil
maps and county average land rents to proxy for type. The policy is nominally structured
as an auction in order to induce producers to reveal the true opportunity cost of their land.
In practice, however, the program is similar to a Pigouvian subsidy since most producers bid
at or near the maximum permissible rental rate.

By examining three “pure” hypothetical programs, the analysis conducted here pro-
vides guidance to policy makers interested in reducing the cost of the environmental policy.
For example, if the second-best program closely approximates the full information program,
efforts may be better spent redesigning the program to make it function more like a true
auction rather than gathering detailed soil data and developing agronomic/economic models
linking soil type to overall profit. The results of the exercise indicate the contrary, however.
The second-best mechanism performs only slightly better than a linear Pigouvian subsidy.
Even absent any transition costs, the savings from perfecting the program (given that type
is unobservable) are in the order of one penny per acre. More significant cost reductions can
only be obtained by gathering data to overcome the information asymmetry.

Notes

¹ Although agriculture may not leap to mind as an unregulated profit-maximizing sector,
since 1996 government payments have largely been independent of farm production decisions.

²Kopp and Mullahy (1990) was the first to use GMM techniques to estimate a cost
frontier. Kleit and Terrell (2001) and Knittel (2002) have used stochastic frontier analysis
to infer the impact of regulatory framework on costs in the electricity sector.

³All computations in Sections II and IV were programmed in Gauss 5.0.

⁴Disaggregated outputs include barley, canola, cotton, fruit, hay, oats, potatoes, rice,

19

<<   17   18   19   20   21   22   23   >>

More intriguing information