Chapter 34 Information, incentives, and the design of agricultural policies

This chapter surveys studies that have used the methods of mechanism design, optimal taxation, nonlinear pricing, and principal-agent analyses in the analysis of agricultural policy. The optimal design and reform of agricultural policy are studied under the presumption that agricultural producers are better informed about their technology or their actions than agricultural policy makers. The existence of these information asymmetries creates incentive problems that must be tackled in the design of an optimal agricultural policy. Two basic types of information asymmetries are studied, those associated with hidden knowledge and those with hidden action. Hidden knowledge occurs when the farmer has exact information about his technology, but the regulator does not. Hidden action occurs when only the farmer has exact information on the conditions, including the state of Nature and the farmer's actions, under which production takes place.