A dynamic analysis of cost-share agri-environmental programs

The purpose of this paper is to theoretically examine the efficiency of a cost-share agri-environmental program through a farm life cycle lens. Faced with a growing environmental impact from agricultural production, the farmer must decide when and how aggressively to invest in environmental capital. The steady state of the optimal control problem reveals the trade-off between allocating farm profits to consumption versus environmental improvements. A payment from a cost-share program reduces the time to investment in environmental capital, and also permanently increases the farmer's level of investment. A lack of targeting results in inframarginal farmers being paid more than the minimum amount that is required to induce investment. The portion of both the marginal payment and the average payment that induces new investment declines as the government's share of the payment increases, and this decline decreases overall program efficiency. Despite this inefficiency, a larger payment from a cost-share program is shown to decrease the farm's environmental impact in both the short and long run.