Contract Design for the Purchase of Environmental Goods from Agriculture

JunJie Wu and Bruce Babcock

American Journal of Agricultural Economics, 1996, vol. 78, issue 4, 935-945

Abstract: An environmental stewardship program, whereby farmers are paid directly for the environmental goods they provide, is developed by combining the microparameter distribution model with mechanism design principles. The program overcomes the information asymmetry between farmers and governments and accounts for the deadweight losses from distortionary taxes. The characteristics of optimal input and payment schedules of the program are derived. These optimal schedules are determined by the tradeoffs between farming profits, environmental benefits, and deadweight losses from taxes, and are second-best except under restrictive conditions on deadweight losses from taxes and on the marginal product of inputs and marginal pollution costs. Copyright 1996, Oxford University Press.

Date: 1996
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American Journal of Agricultural Economics is currently edited by Madhu Khanna, Brian E. Roe, James Vercammen and JunJie Wu

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