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Abstract

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. Policymakers 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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