Agricultural Economics Department
Date of this Version
5-2011
Abstract
The paper examines the choice to adopt conservation technology under input price uncertainty. The primary question addressed is whether a firm is more or less likely to adopt conservation technology when input prices are stochastic. The results are critical to determining whether programs and contracts that reduce input price uncertainty may deter the adoption of conservation practices. An economic model that compares the technology adoption decision is developed. Results depend on several factors. The ability to shut down reduces the effective price of the input conditional on operation and profits are only earned when a firm is in operation. Both of these factors reduce the probability of a firm adopting conservation technology with uncertain prices. On the other hand, conservation technology allows a firm to operate over a greater range of input prices, a factor that increases the probability of adoption under uncertain input prices. Risk aversion also increases the probability of adoption for risk averse firms when a technology is risk-reducing. Results are estimated using irrigation technology adoption data. Empirical results show that ignoring differences in sample characteristics can bias the estimation of price uncertainty on adoption. The results show that after those biases are accounted for, a stable input price decreases the adoption of conservation technology, but the impact also depends on crop choice and land quality characteristics.
Comments
White paper; issued May 31, 2011; revised version July 2012.