a) Consider a model of voluntary incentive mechanism designed for private landowners to induce them to...
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a) Consider a model of voluntary incentive mechanism designed for private landowners to induce them to retire land for protecting biodiversity on private land, similar to the one we discussed in the lecture. The regulator designs a contract to maximize social welfare from biodiversity protection subject to the landowner'sparticipation constraint and incentive compatibility constraint. Social welfare is: a landowner's utility plus social benefits from biodiversity protection minus the monetary compensation scaled by the social value of public funds. Assume: • A There is a social norm of protecting biodiversity on private land. • Each landowner has fixed and homogeneous land-endowment, i.e., A acres, and ith landowner retires ai (with ai s A) acres of land. • O Rent function from land is ni(A – ai) which is increasing and concave. • Landowners are risk neutral. • | || denotes monetary transfer from the regulator to the landowner i for each acres of land retired. • | (X) denotes social benefit from biodiversity protection when a acres of land are retired. B(a) is concave in a. • | || is a landowner's intrinsic valuation for money, where i = H, L, and 0H > OL. • X A landowner can be one of two types-green and brown. A landowner with 0L is a green type as she is more concerned about the environment than monetary gain. A landowner with 0H is a brown type. • * Reputation, R, is defined as the observers' posterior belief about the landowner's true valuation for money (as we discussed in the lecture). Formally, R = E(0|a, t). Also, %3D RG= E(0-la, t) and RB- E(0Hja, t), where R andRB are reputation for green and brown type landowner. Note that, aR/aa > 0 and aR/at < 0. | A landowner's utility is her rent function plus the compensation she receives from the regulator times her intrinsic valuation for money plus her reputation. i) Under complete information about 0, set up the objective function of the regulator and identify the constraints. Comment on the optimal transfer that a landowner would receive in this case. [Word limit 200] [8 marks] ii) Under asymmetric information about 0, set up the regulator's objective function and identify the constraints. From the constraints, comment on 'information rent. Explain each step intuitively. [Word limit 400] [12 marks] b) [Word limit 500] State and briefly explain Coase's mechanism in the presence of an externality. Give one real world example where the idea of Coase's mechanism is implemented in policy. Explain the context and application clearly and intuitively. [10 marks] a) Consider a model of voluntary incentive mechanism designed for private landowners to induce them to retire land for protecting biodiversity on private land, similar to the one we discussed in the lecture. The regulator designs a contract to maximize social welfare from biodiversity protection subject to the landowner'sparticipation constraint and incentive compatibility constraint. Social welfare is: a landowner's utility plus social benefits from biodiversity protection minus the monetary compensation scaled by the social value of public funds. Assume: • A There is a social norm of protecting biodiversity on private land. • Each landowner has fixed and homogeneous land-endowment, i.e., A acres, and ith landowner retires ai (with ai s A) acres of land. • O Rent function from land is ni(A – ai) which is increasing and concave. • Landowners are risk neutral. • | || denotes monetary transfer from the regulator to the landowner i for each acres of land retired. • | (X) denotes social benefit from biodiversity protection when a acres of land are retired. B(a) is concave in a. • | || is a landowner's intrinsic valuation for money, where i = H, L, and 0H > OL. • X A landowner can be one of two types-green and brown. A landowner with 0L is a green type as she is more concerned about the environment than monetary gain. A landowner with 0H is a brown type. • * Reputation, R, is defined as the observers' posterior belief about the landowner's true valuation for money (as we discussed in the lecture). Formally, R = E(0|a, t). Also, %3D RG= E(0-la, t) and RB- E(0Hja, t), where R andRB are reputation for green and brown type landowner. Note that, aR/aa > 0 and aR/at < 0. | A landowner's utility is her rent function plus the compensation she receives from the regulator times her intrinsic valuation for money plus her reputation. i) Under complete information about 0, set up the objective function of the regulator and identify the constraints. Comment on the optimal transfer that a landowner would receive in this case. [Word limit 200] [8 marks] ii) Under asymmetric information about 0, set up the regulator's objective function and identify the constraints. From the constraints, comment on 'information rent. Explain each step intuitively. [Word limit 400] [12 marks] b) [Word limit 500] State and briefly explain Coase's mechanism in the presence of an externality. Give one real world example where the idea of Coase's mechanism is implemented in policy. Explain the context and application clearly and intuitively. [10 marks]
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Related Book For
Introduction to Algorithms
ISBN: 978-0262033848
3rd edition
Authors: Thomas H. Cormen, Charles E. Leiserson, Ronald L. Rivest
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