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Incentive‐Compatible Pollution Control Policies under Asymmetric Information on Both Risk Preferences and Technology
Author(s) -
Peterson Jeffrey M.,
Boisvert Richard N.
Publication year - 2004
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1111/j.0092-5853.2004.00579.x
Subject(s) - incentive , government (linguistics) , control (management) , information asymmetry , incentive compatibility , public economics , microeconomics , mechanism design , risk aversion (psychology) , diversity (politics) , mechanism (biology) , environmental economics , business , risk analysis (engineering) , economics , expected utility hypothesis , linguistics , philosophy , management , mathematical economics , sociology , anthropology , epistemology
This article proposes a method to accommodate asymmetric information on farmers' risk preferences in designing voluntary environmental policies. By incorporating stochastic efficiency rules in a mechanism design problem, the government can find incentive‐compatible policies by knowing only the general class of risk preferences among farmers. The model also accounts for hidden information on technology types and input use. The method is applied empirically to simulate a pollution control program in New York. Results suggest that participation incentives would be inadequate for many risk‐averse producers if the government does not account for the diversity in risk preferences.