Green subsidies in agriculture: Estimating the adoption costs of conservation tillage from observed behavior

Due to payoff uncertainties combined with risk aversion and/or real options, farmers may demand a premium in order to adopt conservation tillage practices, over and above the compensation for the expected profit losses (if any). We propose a method of directly estimating the financial incentives required for adopting conservation tillage and distinguishing between the expected payoff and premium of adoption based on the observed behavior. We find that the premium may play a significant role in farmers' adoption decisions. In an application to the state of Iowa, we find that if a uniform conservation tillage adoption subsidy program were offered in 1992, over 86% of the subsidy program payments would be an income transfer to existing and low-cost adopters.