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Abstract

This paper analyzes the efficient design of green payments. Green payments can generate environmental benefits and support farmers' income. We extend a standard adverse selection model by incorporating dual policy goals into the design of green payments: conservation and income support. We also introduce heterogeneity into conservation efficiency type. The results of our dual-goal model and the standard adverse selection model are significantly different. The differences arise from two aspects. First, since farmers may receive green payments for conservation, or income support, or both, the incentive structure in the standard adverse selection model can be significantly altered. Second, information rent is no longer just a cost to induce truthful revelation, it also acts as income support if it goes to farmers whose income support is valued by policymakers. These two differences have important implications for the design of green payments.

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