Determinants of the Allocation of the Conservation Reserve Program and Landowners' Enrollment Decisions

Abstract

Paying landowners to undertake and invest in long term conservation on agricultural land in lieu of production is a strategy that has been employed in the United States on a large scale since 1986, via the Conservation Reserve Program (CRP). The literature has identified that this policy, its implementation, and the incentives it creates have resulted in excess rents to landowners, increased program outlays, and an inefficient targeting of environmental benefits. An explanation for these that remains largely unexplored in the current literature is that the program operates within and is affected by the political market: political forces which aim to affect the allocation of program benefits are redistributive in nature. Using CRP enrollment data, the program is analyzed by panel estimation to identify whether and to what extent state level membership on Congressional committees with program jurisdiction have resulted in distributional effects on the allocation of program acreage (enrollments) and payments. Understanding the role of the political economy in the CRP enhances the current literature by identifying and characterizing one potential determinant of the program’s enrollment outcomes. Committee membership does appear to matter to the allocation of state level CRP payments and acres though the relationship between the membership measures used herein and enrollments has changed over time. Complementary to the political economy perspective in understanding the determinants of enrollment is that landowners then respond optimally to the incentives produced by the political and regulatory processes. The Environmental Benefits Index (EBI) is the ranking mechanism used to enroll land into the CRP and the index provides a higher probability of acceptance for landowners in certain priority regions. An expected return maximization theory describing landowners’ offer decision is presented and, using contract-level CRP offer data, estimations are conducted to identify the effect of priority area designations on the rental rates offered by landowners in the Prairie Pothole National Conservation Priority Area. Priority area designations are exogenous to the landowner and conventional thought regarding the program’s offer process is that a landowner will increase his rental rate to extract rent if his probability of enrollment becomes exogenously greater. However, contrary to popular thought, the theoretical and empirical results reveal that landowners who receive exogenously-based EBI points may reduce their rental rates to maximize their expected return to enrolling. This provides supporting evidence that the CRP’s enrollment process induces behavior that may reveal landowners’ opportunity cost of enrollment and that landowners respond to enrollment incentives in a manner consistent with a maximization of the expected returns to enrollment. The ability examine offer behavior across many signup periods is an important extension of the current literature, which generally relies on enrollment outcomes to reveal information about offer behavior. While not novel, the expected return maximization theory contributes to the current literature by allowing a rent-reducing response to higher EBI points. This approach and the findings have potentially important implications for the CRP’s future implementation and program cost-benefit analyses.