The optimal design of farm policy and public investment in agriculture in the presence of asymmetric information between the government and farmers is studied. It is shown that a mix of capped deficiency payments and voluntary paid land diversion can implement the optimal policy outcome. Optimal program design requires large farmers to farm all their land, and small farmers may or may not divert acreage. Decoupled policies are never optimal.
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Bourgeon et al. (2000) studied this question.
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