Farmer Premiums for the Voluntary Adoption of Conservation Plans

Programs that reimburse farmers for the cost of implementing more environmentally benign management practices are becoming increasingly popular in both the US and the EU. Utilizing the random utility and random profit difference approaches, the paper develops a theoretical model that explains why farmers may require a premium in excess of the decrease in profits to adopt a conservation plan, and may even require a premium in the case where adoption of the plan is associated with a mean increase in profits. This premium is estimated using a survey of farmers in conjunction with predictions of changes in production costs.