Phosphorus loadings from agricultural fields is of particular concern in freshwater systems because it causes eutrophication leading to algal blooms and hypoxia or anoxia, a state of low dissolved oxygen in water, causing deaths to aquatic animals and releasing various forms of phosphorus resulting in further eutrophication. Farmers' land management practices, including the timing, rate and placement of fertilizers, crop rotation and tillage choices have large impacts on the amount of nonpoint source pollution that is generated within a watershed. The environmental impacts from agricultural nonpoint source runoff have become a significant issue in Lake Erie due to phosphorus concentrations and subsequent large algal blooms. Thus it is extremely important for us to understand how farmers make best management practice decisions. This dissertation investigates the role of farmer decision making, particularly tillage choices, and investigates primarily the following factors: (a) farmers are motivated by factors other than profit, i.e. the role of non-pecuniary factors, (b) farmers are heterogeneous in their preferences, and (c) one important non-pecuniary factor that contributes towards heterogeneity of farmer choices is that of peer effects. This study consists of two separate investigations on the same data set. Following chapters 1, 2 and 3, in which I introduce the topic, provide a literature review and describe the data respectively, chapters 4 and 5 provide the analysis of a joint crop-farm management decision. In chapter 4, I investigate the heterogeneity of farmer preferences using a latent class model, and in chapter 5 I investigate the role of peer effects using a Brock and Durlauf (2002) framework.
More specifically, in chapter 4, I investigate an aspect of farmer decision making, that has thus far not been considered in detail: the extent to which farmers may be heterogeneous not only in their attitudes towards risk and other classic economic determinants of choices, but also in their preferences for environmental quality and stewardship and how this affects their land management choices. Using survey data on farmers and their farm management practices from a northwest region of Ohio, I model the individual heterogeneity of farmers’ preferences for crop choice and farm management practices that influence environmental quality. The hypothesis is that heterogeneity among farmers in their environmental beliefs and preferences significantly influences farm management choices. The discrete choice model posits a joint crop-farm management decision in which farmers make a profit-maximizing decision regarding crop type and conditional on crop choice, choose the management practice that maximizes their utility. Unlike crop choice, which is hypothesized, to depend solely on expected profits, we contend that management choices are influenced not only by costs, but also by heterogeneous preferences for environmental quality. The heterogeneity of individuals is modeled using a latent class model, which posits a finite number of unobserved (to the econometrician) classes. Marginal utility parameters are constant within a class but vary across classes. The results indicate that there are two classes of farmers in the sample: one environmentally more conscious (72%) than the other (28%). Farmers in the environmentally more conscious group leave higher residue on the land; assign more relative weight to environment; are more aware of general environmental issues; are younger and less educated. Profit is not an important driver of class, and each class weight profit similarly, while awareness about environmental issues is an important driver of class. Crop, livestock and farm size are important predictors of tillage choice.
Chapter 5 investigates the role of peer effects on tillage choices of farmers. Current research on farmers' decision making processes focuses on pecuniary variables like profitability of adopted practices while ignoring farmer heterogeneity and the role non-pecuniary factors like those of social interactions. Chapter 5 contends that there is an underlying farmer preference structure which is influenced by neighborhood level variables and peer effects. This paper finds a strong impact of peer effects using a Brock and Durlauf (2002) framework. The presence of heterogeneity of farmer decision making is tested by employing latent class analysis which indicates that there are two different classes of farmers. Peer effects determine the class to which a farmer belongs, and contingent on class membership farmers make tillage choices. Farmers in class one are more responsive to choices made by their peers and are more likely to use reduced tillage practices that involve less disruption of the soil, while farmers in class two are less responsive to choices made by their peers and more likely to use conventional tillage practices. The upshot of the results from this paper is that it is useful for policymakers to take into account the effect of non-pecuniary variables, like peer effects and awareness of environmental issues, to design more effective policy prescriptions.
The focus of the dissertation is to understand the role of non-pecuniary factors on farmer decision making about land management. The results indicate the presence of heterogeneity of farmer preferences. Despite farmer heterogeneity in terms of their choices, and demographics like age, and education, individual farmers respond similarly to pecuniary factors, like profitability. Individual farmers concern for environmental stewardship is a basis on which a farmer belongs to a class of environmentally more conscious class, and makes farmers more likely to choose tillage practices which are more suited for soil conservation. Moreover, farmers respond to non-pecuniary factors like what their peers are choosing. Greater knowledge of the mechanism of how non-pecuniary factors impact farmer decision making will render policy prescriptions more efficacious, than without the knowledge of the impact of non-pecuniary factors.