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

Farmers choose to avoid some risks by not engaging into practices with uncertain profits. Yet, they still face background risk beyond their control, such as climate change. The impact of background risk on decisions to adopt risky environment-friendly agricultural practices is analysed through a theoretical model and a public good experiment. We find that background risk discourages adoption, despite the fact that it affects both environmentally-friendly and conventionally farmed land equally. An incentive payment increases adoption but is significantly less efficient in the presence of both foreground and background risks. Results shed light on potential synergies between greening the CAP and supporting risk management