Assessing the Productivity Consequences of Agri-Environmental Practices When Adoption Is Endogenous

VATT Institute for Economic Research Working Papers 112

45 Pages Posted: 3 Jan 2019

See all articles by AJ Bostian

AJ Bostian

Tampere University - School of Social Sciences and Humanities

Moriah Bostian

Lewis & Clark College - Department of Economics

Marita Laukkanen

VATT Institute for Economic Research, Finland; University of Helsinki - Department of Political and Economic Studies

Antti Simola

Government of the Republic of Finland - VATT Institute for Economic Research

Date Written: December 17, 2018

Abstract

We address the general problem of selection bias, endemic to analyzing the effects of any policy where adoption is voluntary, with 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 these practices tend to reduce yield, frontier analysis without the endogeneity correction greatly understates productivity losses. In other words, naively basing the frontier estimator on the subset of less productive farms leads to downward bias in the resulting frontier estimates. In fact, average inefficiency more than doubles after the correction in this case. An outlier investigation also 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 Classification: Q53, Q58, Q18, Q12, D24, C54, C34, C36

Suggested Citation

Bostian, AJ and Bostian, Moriah and Laukkanen, Marita and Simola, Antti, Assessing the Productivity Consequences of Agri-Environmental Practices When Adoption Is Endogenous (December 17, 2018). VATT Institute for Economic Research Working Papers 112, Available at SSRN: https://ssrn.com/abstract=3303124 or http://dx.doi.org/10.2139/ssrn.3303124

AJ Bostian (Contact Author)

Tampere University - School of Social Sciences and Humanities ( email )

Tampere, FIN-33101
Finland

Moriah Bostian

Lewis & Clark College - Department of Economics ( email )

Portland, OR 97204
United States

Marita Laukkanen

VATT Institute for Economic Research, Finland ( email )

Arkadiankatu 7
Helsinki, FIN-00531
Finland

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland

Antti Simola

Government of the Republic of Finland - VATT Institute for Economic Research ( email )

Arkadiankatu 7
P.O Box 1279
Helsinki, FIN-00531
Finland
+358295519448 (Phone)

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