Implementing Second-best Environmental Policy under Adverse Selection

A key obstacle to practical application of mechanism design theory in regulation is the difficulty of obtaining consistent beliefs regarding information assumed to be commonly held in the models. This paper presents a solution to this problem by developing an easily-implemented empirical methodology with which the government can use commonly available data to develop beliefs regarding the technology and distribution of types in a regulated sector characterized by hidden information. Results are used to calibrate a second-best land conservation mechanism and evaluate its cost relative to simpler alternatives