UD study links real, perceived transaction costs to low farmer participation in BMP programs

Leah Palm-Forster has conducted research that shows it is best to keep things simple when it comes to creating agri-environmental programs to help farmers adopt best management practices.
Leah Palm-Forster has conducted research that shows it is best to keep things simple when it comes to creating agri-environmental programs to help farmers adopt best management practices.

When it comes to creating agri-environmental programs to help farmers adopt best management practices (BMPs) that will help protect the land and not hinder crop yields, new research from the University of Delaware shows that it is best to keep the programs simple.

Both real and perceived transaction costs — the time and effort it takes farmers to enroll in the programs — are detrimental and limit the amount of participation. This is especially true when reverse auctions are used in the enrollment process for agri-environmental programs.

The research was led by Leah Palm-Forster, assistant professor in UD’s Department of Applied Economics and Statistics, and was published recently in the American Journal of Agricultural Economics.

Palm-Forster conducted the research with Scott Swinton, Frank Lupi, and Robert Shupp, who are all faculty at Michigan State University. The research is part of a larger study Palm-Forster conducted while a graduate student at Michigan State University that was recently published in the Journal of Great Lakes Research.

Agri-environmental programs have financial incentives that are usually set up in a cost-share, through which a government program will pay a certain rate to have a farmer adopt a management practice that provides environmental benefits.

These programs rely heavily on voluntary participation.

“Farmers’ management practices have a large impact on the environment, in addition to producing all the food and fuel and fiber we consume. In the U.S., in order to get some of these environmental benefits, we rely on voluntary agri-environmental programs. For the most part, we’re not telling farmers that they have to enroll in these programs and adopt certain practices but we’re trying to provide incentives for them to do so. It basically promotes the use of agricultural practices that provide environmental benefits,” said Palm-Forster.

For the study, the research team used a simulation model that took information gleaned from previous research on the Lake Erie Basin focused on phosphorus runoff and toxic algal blooms.

Using information from their work with farmers in the area and biophysical data about the landscape, the researchers put all of the information into an economic behavioral model to predict if farmers would enroll or not based on four different programs to see which would provide the most environmental benefits with the limited conservation budget.

The programs included:

  • A reverse auction, in which farmers submit a bid of how much they would need to be paid in order to adopt one of these practices;
  • A uniform payment program, in which everyone is paid the same amount for adopting a certain practice and enrolled on a first come, first served basis;
  • Another uniform payment program targeted to the most vulnerable areas of the watershed, in which only farmers in those areas were allowed to enroll; and
  • A program in which farmers were actually offered the exact amount of money they would require to adopt a certain practice, a program that Palm-Forster said would never exist in reality but that was used as a baseline.

Transaction costs

Palm-Forster showed how participation is influenced by the transaction costs of enrollment in each program. These costs include the time and effort required to apply for and enroll in the program. The transaction costs associated with each of the programs hindered participants’ willingness to enroll in them, but the one that was hurt the most turned out to be the reverse auctions.

“One thing with the reverse auction program is that you need a good baseline of the environmental health level compared to what it would be like with the practice. To get all of that information, farmers are asked to submit management protocols and maps of their fields, and it’s just a lot of information. We found that the transaction costs could be particularly burdensome for reverse auctions,” said Palm-Forster.

The research team also found that the problem could be exacerbated if the land is rented, because then there are multiple people trying to work together.

“The take-home message of the paper was that these transaction costs can be really prohibitive and limit participation. If these transaction costs are perceived to be high for reverse auctions, it could make them less cost effective than a targeted uniform payment program,” said Palm-Forster.

Using programs that targeted certain areas was still key, though, because the untargeted program in which farmers were paid on a first come, first served basis did even worse than the reverse auction, as payments were given to anyone who came to enroll versus focusing on the particularly vulnerable areas.

Palm-Forster said that this paper emphasizes the need to streamline programs like reverse auctions because they can be really cost effective but require a large number of participants, particularly those in environmentally vulnerable areas.

“We need to find ways to really make it worth the farmers’ while to participate and one way to do that would be to make the application for the program as easy as possible,” said Palm-Forster.

One way to accomplish that is increased use of different geographic information systems (GIS) technology. A great deal of information on the land itself is readily available for those creating the programs and including that data ahead of time could limit the amount of information the individual farmers need to provide.

Another could be targeting specific parts of a sensitive region, such as a watershed, rather than using a one-size-fits-all approach to the entire area.

“The farms are so unique, the management practices that they’re using are unique, and there’s so much diversity,” Palm-Forster said. “A lot of research is allowing that heterogeneity to tell a new story and say, ‘Of course one size doesn’t fit all, so what can we learn from the fact that there is so much heterogeneity, and how can we design better programs?’”

It was that thought that spurred her research into reverse auctions. “People were saying that we have to start designing programs that explicitly acknowledge that there are so many differences. Now we just have to figure out how to make those programs work even better and not be as complicated,” she said.

This research was funded by the Great Lakes Protection Fund and the National Science Foundation Long-term Ecological Research Program at the Kellogg Biological Station.

Originally posted on UDaily

Photo by Wenbo Fan