Auction winning,social dynamics and non-compliance in a payment for ecosystem services scheme in Indonesia

Conservation auctions for payment for ecosystem services (PES) are useful to identify the levels of incentives that will cover the opportunity costs of farmers supplying ecosystem services. Although auctions are increasingly used for allocation in PES schemes, the factors that lead to their successful implementation and eventual environmental outcomes are poorly understood in developing countries. We investigated the socio-economic and institutional contexts that led to smallholders' auction winning and eventual compliance using linear mixed-effects models, and post-auction and post-contract surveys. We employed a case study of a conservation contract preceded by a sealed-bid, multiple round, uniform price auction for watershed services from coffee farmers in Lampung, Indonesia. The auction participants presented low education levels, low asset endowments and small plot sizes. The study obtained evidence that farmers with larger plot areas were more likely to win the contracts, suggesting economies of scale. Most farmers considered the auction a fair self-selection mechanism to allocate contracts where allocation was not influenced by power or social rank. Non-compliance was associated with labor availability constraints, short duration of land ownership and existence of previous conservation applications, suggesting lax of capability to invest in applying conservation agriculture. Final bids were however not good predictors of compliance, among other factors, calling into question the potential of auctions to elicit the actual incentive from the farmers. Ensuring that farmers understand the purposes of auctions for effective contract allocation beyond a mere game and identifying farmers that might encounter difficulties fulfilling the contract could increase the likelihood that such a PES scheme would be successful.     

The Value of Dairy Quota under a Commercial Export Milk Program

This paper argues that under a commercial export milk program, the market value of quota will be determined by the spread between the domestic market price and the export price, rather than the conventional wisdom that it is determined by the spread between the domestic milk price and the marginal cost of production. Under this new economy, it is argued that ultimately the market price of dairy quota will be priced independently of firm marginal costs, which implies that low-cost (or high-margin) producers will not hold an economic advantage in bidding for quota over higher-cost producers. Regression results are consistent with the hypothesized positive relationship between quota values and the difference between domestic and export milk price. The average export price has generally increased over time and is approximately equal to the marginal cost for an average producer. The results have implications for a World Trade Organization (WTO) challenge. New Zealand and the United States feel the domestic program acts as an export subsidy by cross-subsidizing production of commercial export milk. The results here suggest that the prices for the filled export contracts are approximately the marginal cost of production for the average producer and not lower, as suggested by the challenge. Export contracts were found to have higher price risk than domestically produced milk. The risk is compounded by the short-term nature of most export contracts. The increase in risk for the commercial export milk program (CEM) implies that it is unlikely many farmers will greatly diversify into CEM contracts unless the uncertainty is reduced.     

Landowners’ conservation motives and the size of information rents in environmental bidding systems

We examine landowners’ conservation motives, conservation costs and information rents in environmental bidding systems designed for forestry with the help of Faustmann and Hartman models and data from Finnish conservation program. We show that the Faustmann landowners receive information rents, on average 55% of the rental payments. For the Hartman landowners the high conservation costs of old stands result in low information rents; they are only 13% of the rental payments. This estimate omits amenity benefits the landowners derive from their forests; accounting for these benefits would increase information rents dramatically. Despite the high information rents, landowners’ conservation motives decrease the rental payment required for participation in the conservation program. Hence, landowners’ conservation motives give governments a great opportunity to allocate conservation contracts in a more cost effective way, thereby extracting larger benefits for scarce conservation funds.     

Bilateral Information Asymmetry in the Design of an Agri‐Environmental Policy: An Application to Peatland Retirement in Norway

Agriculture is a significant source of global greenhouse gas (GHG) emissions. GHG mitigation through agri‐environmental programmes could be important in achieving emission reduction targets under the 2015 UN climate agreement. This study uses the principal‐agent model to examine a peatland retirement programme to reduce agricultural emissions in Norway. The focus is on the role of the government's private information in programme design. Two cases are examined. First, optimal contracts are derived when farmers have private information about the costs of implementing peat land retirement, but the government reveals its information on the resulting public benefits through differentiated contracts. This corresponds to the standard targeting strategy with one‐sided information asymmetry. In the second case, an informed principal model developed by Maskin and Tirole in a 1990 study is employed to address bilateral information asymmetry. Using the informed principal model, the government offers the same menu of contracts to farmers in order not to disclose information on the public benefits from land retirement. Empirical results show that the government can achieve a higher payoff by using a pooling offer.     

Moral hazard and adverse selection effects of cost‐of‐production crop insurance: evidence from the Philippines

This article examines the moral hazard and adverse selection effects of cost‐of‐production (COP) crop insurance products. Building on existing crop insurance models of moral hazard, as well as a survey‐based data set that allows us to separately identify moral hazard from adverse selection, we find evidence that farmers insured under COP contracts spend more on chemical fertilizers and pesticides (i.e. those inputs whose costs determine the indemnity payments). However, since these same COP insured farmers are still likely to use less inputs (like effort) whose costs do not enter the indemnity payment formula, and yield depends on both types of inputs (i.e. the determinants and non‐determinants of the indemnity payments), the final moral hazard effect of COP insurance on yields is ambiguous. Our analysis also suggests that farmers who tend to spend less on chemical fertilizers and pesticides are the ones with private information on soil conditions and pest incidence. These are the types of farmers who adversely select into COP contracts that only cover weather related losses.     

Efficiency of alternative property right allocations when farmers produce multiple environmental goods under the condition of economies of scope

The efficiency implications of different property right allocations when two environmental goods can be produced under the condition of economies of scope are analysed. It is assumed that an environmental agency – acting on behalf of the community – employs an auction-based mechanism to buy biodiversity services from farmers. However, farmers' production of biodiversity produces a second good as a by-product (e.g., mitigation of a river pollutant) that is valued by point-source emitters who are engaged in a pollution trading market. The efficiency implications of allocating the property right of the good, mitigation, to either the agency or farmers are analysed. If the agency owns the mitigation then the agency can sell mitigation to point-source emitters, offsetting the cost of biodiversity. If farmers own mitigation, then they sell it directly to point-source emitters. Assuming similar transaction costs associated with each property-right allocation, allocating the property right to farmers improves efficiency, as farmers take account of their private information to make profit-maximising decisions about the supply of biodiversity and mitigation; the agency would have trouble accessing this private information.     

Factors influencing farmers’ participation in contractual biodiversity conservation: a choice experiment with northern Australian pastoralists

Private landholders’ contributions to biodiversity conservation are critical in landscapes with insufficient formal conservation reserves, as is the case in Australia's tropical savannas. This study reports results from a discrete choice experiment conducted with pastoralists and graziers across northern Australia. The experiment was designed to explore the willingness of pastoralists and graziers to sign up to voluntary biodiversity conservation contracts. Understanding preferences for contractual attributes and preference heterogeneity were additional objectives. Such knowledge can increase effectiveness and efficiency of conservation programs by informing contract design, negotiation and administration. Random parameter logit modelling showed that of contract attributes, conservation requirement, stewardship payment, contract duration and flexibility in contract conditions significantly influenced choices. Land productivity was a significant factor as were attitudes. There was significant heterogeneity of preferences for all contract attributes. Models were run for best–worst scaling responses and the first preferences subset, with the latter model deemed superior. Latent class modelling distinguished four classes of decision‐makers and illustrated different decision heuristics. Conservation investment strategies, which offer farmers contract options that meet biodiversity requirements while accommodating heterogeneous attribute preferences, are likely to lead to increased participation rates. Complementary suasion efforts are also required which espouse the benefits that pastoralists derive from biodiversity and participation in voluntary conservation contracts.     

Courts and contract enforcement in transition agriculture: theory and evidence from Poland

The paper investigates theoretically and empirically the role of courts for contract enforcement in transition agriculture. In a survey of 306 Polish farmers conducted in 1999, only 38.5% respondents reported to believe that they could use courts to enforce contracts with their most important customer. Furthermore, those who believed the legal system could be used would accept significant financial losses before taking action. We develop a theoretical model, based on the costs and benefits of court enforcement, which captures the boundary between contracts to be regarded as 'enforceable' and 'not-enforceable' and, simultaneously, the threshold of taking legal action. The empirical analysis strongly supports our model: (1) the farmers' responses can be explained by cost-benefit calculations regarding the use of courts, (2) the legal 'enforceability' of contracts depends not only on the efficiency of the legal system but also on the attributes of the transaction, the contracts and the relationship between buyer and seller and (3) the threshold of taking legal action is significantly influenced by indirect costs of court enforcement, such as the disruption of a valuable business relationship, and by the availability of alternative enforcement mechanisms.     

More reasons why farmers have so little interest in futures markets

The use by farmers of futures contracts and other hedging instruments has been observed to be low in many situations, and this has sometimes seemed to be considered surprising or even mysterious. We propose that it is, in fact, readily understandable and consistent with rational decision making. Standard models of the decision about optimal hedging show that it is negatively related to basis risk, to quantity risk, and to transaction costs. Farmers who have less uncertainty about prices and those with a diversified portfolio of investments have lower optimal levels of hedging. If a farmer has optimistic price expectations relative to the futures market, the incentive to hedge can be greatly reduced. And finally, farmers who have low levels of risk aversion have little to gain from hedging in terms of risk reduction, in that the certainty‐equivalent payoff at their optimal hedge may be little different than the certainty equivalent under zero hedging. These reasons are additional to the argument of Simmons (2002) who showed that, if capital markets are efficient, farmers can manage their risk exposure through adjusting their leverage, obviating the need for hedging instruments.     

Combining management plans and payment schemes for targeted grassland conservation within the Habitats Directive in Saxony,Eastern Germany

As central policies for biodiversity conservation in agricultural landscapes in the European Union (EU), the Habitats Directive and Agri-environmental programmes (AEP) have largely failed to halt biodiversity loss. In response, the German federal state of Saxony combined the instrument of management plans with AEPs to support the implementation of the Habitat Directive. In this study, we investigate the determinants of a farmers’ decisions to adjust their farming practices. Our data set consists of a quantitative survey with 131 farmers conducted between 2004 and 2011, complemented by implementation data from 333 grassland-plots. Determinants of farmers’ decisions to conserve grassland were estimated using a multinomial logit model. Our results show that a combination of management plans and AEPs can increase farmers’ disposition to adopt nature conservation measures. As central determinants, structural and location factors as well as the complementary provisiion of specifically designed AEPs increase farmers’ willingness to adopt conservation practices for grassland management. It can be concluded that additional costs are a major barrier to farmers’ adoption, particularly to those farms directing their farm management towards the optimisation of productivity and profitability . The findings highlight the complementary potential of integrated policy packages to incentivise specific measures of nature conservation within the framework of the Habitats Directive.     

ECONOMIC ISSUES FROM THE BROADS GRAZING MARSHES CONSERVATION SCHEME

The paper examines two key issues relating to the use of fixed-price conservational contracts of the type embodied in the new Environmentally Sensitive Area policy in the UK. It uses data for the Broads Grazing Marshes Conservation Scheme (BGMCS). The budgetary costs of the fixed-price contract are compared to those of (i) public purchase of land with leaseback for grazing, and (ii) of individual management agreements. Using a net present value criterion, public purchase emerges as the cheapest option, and management agreements as a superior option in defined circumstances. The paper also explores equity and efficiency issues arising from fixed price contracts. It is concluded that for many farmers and landlords in the BGMCS the fixed payment exceeded what was necessary to achieve the conservational objectives, while at the same time it was less than the profit foregone by farmers who might possibly have switched to arable farming.     

Probing the grounds: Developing a payment-by-results agri-environment scheme in Finland

Results-oriented approaches are widely regarded as an effective means to improving cost-effectiveness of agri-climate-environment schemes. We designed a hypothetical payment-by-results scheme for biodiversity conservation on environmental grasslands in Finland. The scheme would pay farmers a premium if the site contains a set number of indicator species, which were selected based on vascular plant surveys of the target habitat type. We presented the hypothetical scheme to 20 farmers and six experts (researchers, officials and advisors) in agricultural policy for their opinions on the payment-by-result approach generally and the hypothetical scheme specifically. The indicator species list proved suitable for identifying sites with high total species richness of vascular plants and also appeared feasible in the eyes of the farmers. Farmers were mostly positive about the approach and, mainly, thought their peers and society at large would receive it positively. The main concerns were about implementation, especially verifying the biodiversity results. People working for the national control body were the most critical and could not see how the hypothetical scheme could fit into the current institutionalised programme. Experience in other countries may provide solutions for overcoming such obstacles. The results are highly relevant for a discourse on social experimentation and cost-efficient delivery of public goods for public money.     

Factors influencing hedging decision: evidence from Brazilian citrus growers

The purpose of this study was to analyse the hedging behaviour of 98 citrus growers from the State of Sao Paulo, Brazil. Marketing behaviour was modelled as a choice between spot market, short and long‐term forward contracts. A multinomial logistic regression model was used to evaluate the role of behavioural, personal and managerial variables in the choice. Results indicated that the factors which explain the use of forward contracts by citrus growers are the following: risk propensity; trade with juice processing companies; farming diversification; overconfidence in management; participation in pools; use of management tools; and technical assistance. The results can be useful for farmers, policymakers, government agencies, traders and extension agents.     

What role for cooperation in conservation tenders? Paying farmer groups in the High Andes

This paper sheds light on the potential of group-level tenders to enhance conservation where it depends on cooperation of small-scale farmers. We analyze data from two pilot payment for ecosystem service (PES) schemes focused on the conservation of agricultural biodiversity in the Bolivian and Peruvian Andes. Contracts were assigned to farming groups who could choose between different types of in-kind payments with varying degrees of divisibility between group members. Our main results indicate that: (1) stronger general patterns of collective action are positively related to the level of cooperation in group-bid making; (2) where collective action is robust, collective payments seem to provide stronger conservation incentives than individual payments; (3) collective payments could mitigate some potential rent-seeking behavior; (4) selecting bid offers based on both a ‘cooperation’ criterion and conservation land area offered does not overly compromise the cost-effectiveness of PES; and (5) group-level contracts may create strong incentives for contract compliance. Hence, combining farmer group-level contracts with collective in-kind payments can enhance the cost-effectiveness of conservation tenders, while generating co-benefits in terms of increased interaction and social capital among group members.     

Endogenous institutional innovation and agroindustrialization on the Peruvian coast

This paper presents an analysis of endogenous institutional innovations that have recently emerged in the agroindustrial zone of Chincha, on the coast of Peru. These innovations include: (1) contracts between agroindustrial firms and large farmers, introduced by the firms themselves to assure timely delivery and compliance with strict requirements implied by the emerging demanding quality and safety standards for agro‐export of processed asparagus; (2) management services exchanged for labor supervision and land collateral in share tenancy contracts between a management company and “farmer companies” of small cotton farmers. These contracts introduced by the management company illustrate those described theoretically by Eswaran and Kotwal [Am. Econ. Rev. 75 (3), 352–367]. The nature and importance of these institutional changes are twofold: (1) They were induced institutional innovations driven by the requirements of agroindustrialization itself. (2) Together they had ambiguous employment and income impacts (tending to the negative). On the one hand, the emergence of asparagus and firm‐farm contracts reduced employment through exclusion of small farms and shifts to capital‐intensive crops. On the other hand, the reinforcement of smallholder cotton and the emergence of farmer companies increased employment and income of smallholders. The institutional innovation allowed them to reduce risk and increase profits and thus access some of the benefits of agroindustrialization and globalization. While processing firm‐farm contracts are common in Peru, as is the presence of NGOs bringing subsidized credit, the private management firm innovation is rare and new in Peru and apparently also in the region, and of great interest. In fact, policymakers and NGOs have recently discovered that this innovation is taking place and are asking hard questions about whether this innovation can and will be diffused. The interest in the private for‐profit institutional change is sharpened by growing doubts about how economically sustainable and widespread a response NGO help can be to small farmers in maintaining their participation in income‐enhancing agroindustrialization. Moreover, with changes in land laws and markets the fluidity of the situation is apparent, with agroindustrial firms even starting to ask themselves whether contracts with large farms are necessary and best.     

Factors affecting farmers’ acceptance of conservation measures—A case study from north-eastern Germany

Intensive forms of agriculture have been proven to cause severe environmental effects, such as soil erosion by water and wind, or the pollution of ground and surface water with nutrients and pesticides contributing to the deterioration of natural habitats and the loss in biodiversity. In order to avoid or mitigate these detrimental environmental effects, a number of conservation measures can be undertaken by farmers. However, the adoption of these measures is highly dependent on the assumed benefits and risks attached as well as the personal perception and attitude of the individual farmer.This paper presents the outcome of a survey conducted in north-eastern Germany aimed at analysing farmers’ acceptance of different conservation measures. Eleven farmers, managing more than 80% (about 13,000 ha) of the agricultural land in the chosen case study region were interviewed. Respondents were asked about their personal experiences with different environmental measures and requested to assess these measures, e.g., regarding costs, time and labour demands, attached risks, or effectiveness. They also ranked these factors in terms of importance for decision making on adoption or rejection of a new measure. The findings show that, despite of the general assumption that farmers’ decisions are mostly driven by economic rationality, costs were not the most important factor. Other factors, like associated risks, effectiveness, or time and effort necessary to implement a certain measure were equally or even more important depending on the specific situation.     

Finding default? Understanding the drivers of default on contracts with farmers’ organizations under the World Food Programme Purchase for progress pilot

During the past two decades, food assistance policy has shifted toward local or regional food purchases and away from purchases from donor countries. Although most local and regional procurement occurs through hard tendering processes open to large‐scale firms and farms, there is growing interest in identifying how and whether to procure from smallholder farmer organizations (FOs). To date, little is known about the drivers of successful contracting with FOs. We utilize data from the United Nations World Food Programme Purchase for Progress pilot in three East African countries to predict defaults on contracts. We examine four possible explanations: country contexts, FO characteristics, prior experience with contracts, and contract modalities and their relationship to local spot market prices. The single most important predictor of default is the increase in market prices between contract approval and delivery. Yet, although increases in market prices are linked to increases in default, this relationship is decreasing in contract size, indicating search costs associated with breaking contracts. Our findings yield both generalizable and context‐specific insights about whether—and when—procuring from smallholder farmers can be successfully integrated into the food assistance toolkit.     

Adverse Selection in the Environmental Stewardship Scheme: Does the Higher Level Stewardship Scheme Design Reduce Adverse Selection?

The Environmental Stewardship Scheme provides payments to farmers for the provision of environmental services based on foregone agricultural income. This creates a potential incentive compatibility problem which, combined with information asymmetry about farm land potential, can lead to adverse selection of land into the Scheme and therefore a less cost‐effective provision of environmental goods and services. However, the Higher Level Stewardship (HLS) Scheme design includes some features that potentially reduce adverse selection. This paper studies the adverse selection problem of the HLS using a principal‐agent framework at the regional level. It is found that, at the regional level, the enrolment of more land from lower payment regions for a given budget constraint has reduced the adverse selection problem through contracting a greater overall area and thus higher overall environmental benefit. In addition, for landscape regions with the same payment rate (i.e. of the same agricultural value), differential weighting of the public demand for environmental goods and services provided by agriculture (measured by weighting an environmental benefit function by the distance to main cities) appears to be reflected in the regulator’s allocation of contracts, thereby also reducing the adverse selection problem.     

Economic Risk and Water Quality Protection in Agriculture

Producers' and consumers' risk perceptions and preferences can affect perceived costs and benefits of agricultural water quality protection. Many studies find that integrated pest management actually reduces economic risks to farmers. Results from crop rotation and conservation tillage studies are mixed, while nutrient management studies indicate a potential for higher risk compared with conventional practices. Uncertainty about pollution damages to water resources is likely also to increase the perceived benefits of a given quantity of water quality protection practices. Public policies to reduce uncertainty about the costs and benefits of water quality protection practices may produce net social benefits.     

The Potential for Nitrogen Abatement Trading in Agriculture: A Hypothetical Market Experiment

The effectiveness of nitrogen abatement trading as a policy measure relies on both heterogeneity in costs and environmental effectiveness across landscapes. Cost‐efficient implementation may therefore critically depend on spatial distributions of farm and farmer characteristics in water catchments. We use a spatially specific hypothetical market experiment to analyse the likelihood of farmers’ enrolment into nitrogen abatement trading contracts, and derive demand and supply functions for farmers’ nitrogen abatement. We find that farm characteristics influence both the decision whether to supply or purchase nitrogen abatement, as well as the amounts being traded. The derived demand and supply functions for farmers’ N abatement, using hypothetical market experiment data, can be used to reveal the variability in costs of abatement within a market. This provides valuable information to test potential trading schemes ex ante, to evaluate potential economic gains from policy implementation.