Contracts for Land Retirement under Asymmetric Information
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A land retirement policy whereby land is taken out of agriculture and converted to natural
vegetation or forestry has the potential to reduce environmental damage related to dryland
salinity in Western Australia. This paper uses some recent results in the theory of directional
distance functions (Chambers and Fare, 2004) to analyse alternative policy designs for a land
retirement scheme. The results indicate that a fixed price scheme is inefficient compared with
a first-best solution, but performs adequately. A scheme requiring a fixed proportion of area
retired by all producers is inefficient. A separating solution, based on mechanism design, gives
a small but siginificant increase in welfare compared to a fixed price scheme.