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Assessing the productivity consequences of agri-environmental practices when adoption is endogenous

  • AJ A. Bostian
  • Moriah B. BostianEmail author
  • Marita Laukkanen
  • Antti Simola
Article
  • 16 Downloads

Abstract

We address the general problem of selection bias, an issue endemic to policy analysis when adoption is voluntary, with an empirical application to environmental policies for agriculture. Many voluntary practices for mitigating the environmental impacts of agriculture provide external benefits while lowering productivity. Policy analysis of the productivity consequences is complicated by the fact that decision makers can choose their own policy levers, an action that ruins any notion of random assignment. We introduce an identification strategy to correct this kind of endogeneity, combining classic methods from stochastic frontier analysis and selection models. Applying it to micro-level data from Finnish grain farms, we find that more efficient producers are more likely to enroll in subsidized practices. And, because those practices tend to reduce yield, frontier analysis without the endogeneity correction greatly understates the productivity loss. In other words, naïvely basing the frontier estimator on the subset of less-productive farms leads to downward bias in the frontier estimates. In fact, average inefficiency more than doubles after the correction in this case. An outlier investigation suggests that the lowest decile of farms are responsible for most of the selection bias in the uncorrected model.

Keywords

Productivity Stochastic frontier analysis Endogeneity Selection model Agri-environmental policy 

JEL

Q53 Q58 Q18 Q12 D24 C54 C34 C36 

Notes

Acknowledgements

We are grateful to several colleagues for their helpful comments: Shawna Grosskopf, David Zirkle; seminar participants at University of Alabama, University of Sydney, Portland State University, University of Helsinki, Umeå University Centre for Environmental and Resource Economics (CERE), and VATT Institute for Economic Research; and conference participants at APPC, EAERE, and EAAE. This work was partially supported by grants from Lewis & Clark College and the J. William Fulbright Foundation.

Compliance with ethical standards

Conflict of interest

The authors declare that they have no conflicts of interest.

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© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.School of Social Sciences and HumanitiesUniversity of TampereTampereFinland
  2. 2.Department of EconomicsLewis & Clark CollegePortlandUSA
  3. 3.Centre for Environmental and Resource Economics (CERE)Umeå UniversityUmeåSweden
  4. 4.University of HelsinkiHelsinkiFinland
  5. 5.VATT Institute for Economic ResearchHelsinkiFinland

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