Adoption of environment-friendly agricultural practices with background risk: experimental evidence

Marianne Lefebvre (), Estelle Midler () and Philippe Bontems ()
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Estelle Midler: Alexander von Humboldt Professorship of Environmental Economics - Universität Osnabrück - Osnabrück University
Philippe Bontems: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique

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Abstract: Agriculture is one of the economic sectors most exposed to exogenous risks such as climate hazards and price volatility on agricultural markets. Agricultural policies targeting the adoption of environment-friendly but potentially risk-increasing practices cannot ignore this challenge. Farmers have indeed to decide if they take the foreground risk associated with the adoption of environment-friendly practices, while simultaneously facing exogenous background risk beyond their control. Using a theoretical model and a public good experiment, we analyse the adoption of agri-environmental practices and the effect of agri-environmental subsidies in a context where risks are both foreground and background. While most of the literature on background risk focuses on its impact on individual decisions, we analyse the influence of background risk in a context of strategic uncertainty (contribution to a public good). The results highlight the potential synergies between greening the CAP and supporting risk management. We find that background risk discourages the adoption of green practices, although it affects all farmland independently from the farmer's choice of practices (environment friendly or conventional). An incentive payment per hectare of land farmed with green practices increases the adoption of risk-increasing practices but is significantly less effective in the presence of background risk.

Keywords: Background risk; Agri-environmental measures; Risk aversion; Public good game; Lab experiment; Common Agricultural Policy (search for similar items in EconPapers)
Date: 2020-05-21
New Economics Papers: this item is included in nep-agr, nep-env, nep-exp and nep-res
Note: View the original document on HAL open archive server: https://univ-angers.hal.science/hal-02615779v1
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Published in Environmental and Resource Economics, 2020, 76 (2-3), pp.405-428. ⟨10.1007/s10640-020-00431-2⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02615779

DOI: 10.1007/s10640-020-00431-2

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