Fixed costs involved in crop pattern changes and agri-environmental schemes

Agri-environmental schemes are the main policy instrument currently available in the European Union to promote environmentally friendly farming practices. Nevertheless, the adoption rate of these measures is still limited. This paper develops a profit maximizer theoretical framework to explain the farmer’s sign-up decision and the area to put under an agri-environmental measure characterised by a change in the crop pattern. The application concerns an agri-environmental measure awarding the introduction of alfalfa in cereal farms in Natura 2000 designated areas of Aragon (Spain). The econometric specification accounts for both the upper censoring of the enrolled area, constrained by the available eligible area, and the self-selection of contractors according to the extra-profit of their enrolment. To test the absence of fixed costs of enrolment, a simple tobit with a lower and an upper bound, that corresponds to the non fixed costs situation, is compared to the censored model with selection. Estimated specifications based on the enrolled area do not provided normally distributed residues and are not suitable to carry out the likelihood ratio test. Estimated specifications based on the share of enrolled area in the eligible area provide normally distributed residues. The likelihood ratio test rejects the absence of fixed costs. Technical factors as well as social capital variables are taken into consideration as determinants of technical and transaction costs. Estimation results show that there is an adoption barrier derived from the know-how affecting the fixed compliance costs of introducing the new crop. In addition, there is an adoption barrier derived from transaction costs which are reduced in the presence of social networks. These results suggest that a non linear payment mechanism or auctions might be suitable to ensure a better coverage of Natura 2000 eligible areas by the contracts, with a limited increase in related public expenditures.