Feng, Hongli

Journal of Environmental Economics and Management Vol. 54 no. 3 (November 2007): 323-335.

We use a mechanism design framework to analyze the optimal design of
green payment policies with the dual goals of conservation and income support
for small farms. Each farm is characterized by two dimensions of attributes:
farms size and conservation efficiency. The policymaker may not be able to use
the attributes as an explicit criterion for payments. We characterize optimal
policy when conservation efficiency is unobservable to policy-makers, and when
farm size is also unobservable. An income support goal is shown to reduce the
conservation distortion caused by asymmetric information. The cost of optimal
green payment mechanisms is shown to depend crucially on whether large or
small farms have greater conservation efficiency.

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