CONTRACT DESIGN FOR THE PURCHASE OF ENVIRONMENTAL GOODS FROM AGRICULTURE

An environmental stewardship program, whereby farmers are paid directl y 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 t he program are derived. These optimal schedules are determined by the tradeoffs between farming profits, environmental benefits, and deadwei ght losses from taxes, and are second-best except under restrictive co nditions on deadweight losses from taxes and on the marginal product o f inputs and marginal pollution costs.