THE SUBSIDY FOR ADOPTING CONSERVATION TILLAGE: ESTIMATION FROM OBSERVED BEHAVIOR

Due to payoff uncertainties combined with risk aversion and/or real options, farmers may demand a premium in order to adopt conservation tillage practices, over and above the compensation for the expected profit losses (if any). We propose a method of directly estimating the financial incentives for adopting conservation tillage and distinguishing between the expected payoff and the premium of adoption based on observed behavior. We find that the premium may play a significant role in farmers' adoption decisions. Even for non-adopters, conservation tillage provides a higher payoff than does conventional tillage on average, as agronomists have argued. However, non-adopters do not use conservation tillage because the expected profit gain alone does not fully compensate them for the uncertainties. To induce additional adoption, subsidies could be used. We find that in Iowa on average, the mean subsidy needed is $2.40 per acre per year for corn and $3.50 per acre per year for soybeans.