WEAI/AERE 2012 - Individual Paper Abstract
Title: Do Late Adopters of Best Management Practices in Agriculture have Higher Discount Rates?
Author(s): Eric DUQUETTE, Nathaniel Higgins, and John Horowitz, Economic Research Service, USDA; USDA/ERS/RRED/RESP 355 E. Street, SW, Washington, DC, 20024-3221 (202) 694-5533 [Photo credit: Creative commons, adapted from http://www.ag.ndsu.edu/DickinsonREC/grassland-research]
Abstract:
Agricultural practices and land uses can affect a host of environmental amenities, including water quality, greenhouse gas emissions, and wildlife habitat. Because of these effects, agricultural and environmental policies have aimed at encouraging farmers to reduce their tillage intensity, reduce fertilizer application rates, and take selected areas out of production and plant them to grass or trees, among other activities. Each of these possibilities requires the farm operator to shift from long-standing practices to new practices that may be warranted either because of new emphasis on the public benefits, new technology that makes the practices less costly, or new understanding of their effects on long-term farm profitability. The willingness to makes these shifts may differ, however, dramatically across farmers. Farmers that are side by side, for example, farming similar soils under similar conditions and with similar eligibility for agricultural programs, may exhibit greatly different farming practices. An understanding of why some farmers more readily participate in conservation programs, take advantage of incentive payments, or adopt beneficial practices can help policymakers develop more cost-effective policies.
In this paper, we measure time preferences of roughly 300 U.S. farmers in a field-experiment and examine the potential role of discount rates in the adoption decisions of environmentally beneficial practices. We use two farmer samples gathered by the American Farmland Trust (AFT). AFT administers the Best Management Practice (BMP) Challenge, which targets farmers who have yet to adopt certain production practices. We compare the estimated discount rates of these "late adopters" to "early adopters," farmers who have already adopted at least some BMPs, have shown interest in water quality trading, or otherwise have taken initiative to improve agricultural and environmental performance. We find that early adopters have discount rates that are significantly lower than late adopters.
Our experimental design is similar to a series of recent experiments that use high-stakes, realmoney discount rate experiments (Andersen et al., 2008; Andreoni and Sprenger, 2010; Coller and Williams, 1999). None of these previous studies looked at farmers or production decisions (although they did look at savings behavior.) Several of the previous papers, including Andersen et al. and Andreoni and Sprenger, estimated utility concavity and marginal rates of time preference jointly. We show that this separation is irrelevant under reasonable assumptions about consumption smoothing behavior and levels of background consumption.