Banerjee explores incentives, nudges for coordinated land use

A three-year study conducted by Simanti Banerjee, assistant professor of agricultural economics at the University of Nebraska-Lincoln, offers insights about how producers can be incentivized to implement pro-environmental land use practices.

In an effort to conserve and restore natural habitat and other environmental functions, the U.S. Department of Agriculture has implemented Payment for Ecosystem Services schemes to encourage voluntary participation. In exchange for a yearly rental payment, producers enrolled in a PES scheme, such as the Conservation Reserve Program, agree to remove environmentally sensitive land from agricultural production or implement various practices on their working lands under the Conservation Stewardship Program.

While the schemes address enrollment and acreage objectives, Banerjee’s research considers enrollment across adjacent properties that may require coordination between neighboring producers. For instance, the habitat and water quality on a producer’s parcels adjacent to a neighbor’s CRP land may affect the biodiversity of the enrolled, environmentally sensitive land.

“Since these programs are an integral part of the agricultural system of the U.S., scientific investigation is important to identify economic and non-economic mechanisms that can generate environmental benefits for agricultural communities and society at large,” Banerjee said.

Banerjee’s research considered the Agglomeration Bonus, which pays producers more if their neighbor implements the same environmentally friendly land use practice. Examples include riparian buffers, wind breaks or foraging patches for pollinators.

Two coordinating mechanisms were tested during the study. The first focused on money only, and varied the payment amounts based on the amount of coordination. The second format was not monetary, but nudged producers with information about land use practices of participants belonging to another community.

Results indicate that coordinated land use rates are higher if payments associated with coordination are higher, which aligns with conventional economic thinking. Having information about outcomes of the Agglomeration Bonus scheme from other communities also improves coordination rates in both communities, meaning that the nudge is effective. This result is in line with behavioral economic findings. The mechanisms were tested on 144 university students in a lab-controlled environment. The next step for Banerjee’s research will be to conduct similar field experiments with producers.

“The combination of evidence from both lab and field studies is essential for making the case for implementing PES schemes with an Agglomeration Bonus format,” Banerjee said. “The experimental evidence I find would support a case to legislators to consider adopting this policy as part of a local or federal conservation program.”

Banerjee said the study results highlight the role behavioral economics and economic experimentation can play in answering questions important to agriculture, the environment and society.

Evidence on cost effectiveness of PES schemes is mixed, which is why the information nudge Banerjee explored could be appealing to regulators. Fund disbursal from the schemes is subject to budget constraints, so being able to rely on information about land use choices of other producers without having to change payment amounts could be an affordable option.

The results of the study were published in the American Journal of Agricultural Economics.