Bilateral Information Asymmetry in the Design of an Agri‐Environmental Policy: An Application to Peatland Retirement in Norway

Wonjoo Cho and David Blandford

Journal of Agricultural Economics, 2019, vol. 70, issue 3, 663-685

Abstract: Agriculture is a significant source of global greenhouse gas (GHG) emissions. GHG mitigation through agri‐environmental programmes could be important in achieving emission reduction targets under the 2015 UN climate agreement. This study uses the principal‐agent model to examine a peatland retirement programme to reduce agricultural emissions in Norway. The focus is on the role of the government's private information in programme design. Two cases are examined. First, optimal contracts are derived when farmers have private information about the costs of implementing peat land retirement, but the government reveals its information on the resulting public benefits through differentiated contracts. This corresponds to the standard targeting strategy with one‐sided information asymmetry. In the second case, an informed principal model developed by Maskin and Tirole in a 1990 study is employed to address bilateral information asymmetry. Using the informed principal model, the government offers the same menu of contracts to farmers in order not to disclose information on the public benefits from land retirement. Empirical results show that the government can achieve a higher payoff by using a pooling offer.

Date: 2019
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