Empirical Calibration of a Least-Cost Conservation Reserve Program

duce the degree of hidden information. Over the years, program administrators have chosen
the latter course. The USDA uses soil maps and local land rents to establish county-level
bid caps rather than the previous regional ones.

I calculate potential savings to taxpayers from these two policy alternatives. First,
I evaluate the cost reduction from changing the bidding process so that it functions as a
second-best mechanism rather than a Pigouvian subsidy. Second, I obtain an indication of
the usefulness of efforts undertaken by the government to overcome information asymmetries
by comparing the cost of the first-best (full information) mechanism to the second-best
mechanism.

In Section II, I describe and implement the econometric strategy for developing
consistent beliefs regarding the production technology and distribution of agent types when
agent heterogeneity is unobservable. In Section III, I characterize the theoretical least-cost
land set aside program. In Section IV, I use this information to simulate policy alternatives
for reducing the cost of the CRP.³ Section V contains concluding comments.

II. Empirical Model

A. Specification

Producers are characterized by two exogenously fixed factors, one observable and
one not. The observed fixed factor is acres of land, denoted a ∈ <++ . The unobserved
factor is a type productivity index θ ∈ Θ ≡ (0, 1]. Let x ∈ <₊^N denote the variable-
input vector and q ∈ <₊ denote aggregate output. The variable-input requirement set
is V (q, a, θ) ≡ {x : x can produce q given a, θ}. In addition to V (q, a, θ) being a closed,
convex set, it is assumed to satisfy the following properties:

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