A DYNAMIC PARTICIPATION DECISION MODEL APPLIED TO THE CONSERVATION SECURITY PROGRAM FOR NORTHEASTERN UNITED STATES DAIRY FARMS
The Conservation Security Program was authorized in the 2002 Farm Bill and is hailed by many observers as the first true ?green payments? program for working lands in the United States. Previous analysis and anecdotal evidence for similar conservation programs show that premature termination of contracts is a persistent issue. This type of producer behavior is not easily explained using the standard assumptions of profit-maximization under perfect information and perfect rationality. Rather, this unexpected termination behavior demonstrates the need for analyses that take into account biophysical complexities and alternative decision-making assumptions. An alternative set of behavioral assumptions is explored in this research that employ descriptive rather than normative participation decision rules. The objective of this research is to explore the impact of alternative behavioral assumptions and dynamic biophysical effects of conservation practices on the participation and termination decisions of New York dairy producers. A simulation model is constructed to represent the effects of selected biophysical processes on farm profitability, producers? ability to gather and utilize this information, and finally their decisions to participate in the program. The results of this simulation model provide insights concerning observed termination behavior and suggestions for policy design and implementation. The results of the dynamic participation decision model indicate that premature termination of CSP contracts is possible and even probable under certain conditions. These conditions include the complex biophysical effects of conservation practices, behavioral characteristics of decision makers, and payment schedules of the Conservation Security Program. These are all significant factors affecting if and when producers decide to termination CSP contracts. Termination decisions, in this model, are a result of learning processes, that is, the producer?s realization of new information concerning the profitability, or net revenue from participating in the Conservation Security Program. Behavioral characteristics play a significant role in shaping producers? learning processes and the formation of expectations of net revenue from the CSP contract. Most important for determining participation is the magnitude of the producer?s initial estimation error as well as delays in updating their perceptions and expectations of net revenue. These delays determine a producer?s adjustment times for perceiving new information and the incorporation of that learning into new expectations about net revenue. This expectation formation process can further encourage farmers to terminate their CSP contracts by creating greater amounts of volatility in expectations. The type of decision rule used by the farmer is also of significance when determining if or when a farmer might terminate participation in CSP. This analysis examines ten alternative decision rules. This analysis presents several implications for pragmatic policy solutions to the problem of premature termination of CSP contracts. Foremost, policy makers should look beyond typical cost/benefit models of decision-making when designing inventive structures for conservation programs. Taking into account alternative decision-making behavior, this research recommends an alternative payment schedule to what was implemented in the 2005 CSP sign-up. A more robust policy would be to vary the payment rates to compensate for the expected downturn in farmer perceptions and expectations. Evaluation of several dynamic payment schedules indicated that there are a variety of possible schedules that can increase initial sign-up rates, decrease termination rates, and decrease government expenditures simultaneously. The policy ?fix,? suggested by this analysis, is robust over variations in behavioral characteristics and for multiple decision rules. With this approach, it is possible to simultaneously decrease government expenditure and decrease cumulative termination rates.
conservation; system dynamics; simulation model; participation decisions