Linking agricultural subsidies and ambient water quality to reduce nutrient loss

Conservation compliance rules are designed to reduce soil erosion by requiring farmers to comply with specific conservation standards in order to maintain their eligibility for federal assistance programs, such as subsidized crop insurance. Conservation compliance requirements are typically connected to farmers’ individual management actions and not the resulting outcomes (e.g., nutrient loading in watersheds). In this research, we develop policies to reduce nonpoint source (NPS) pollution that link access to agricultural subsidies to ambient levels of pollution and compliance with conservation goals. Four policy environments (treatments) are tested including: 1) no-policy control, 2) linear ambient tax, 3) subsidy reduction if ambient pollution exceeds an announced threshold, and 4) subsidy reduction based on ambient pollution that individuals can avoid by adopting a costly, pollution-reducing technology. Policies are tested using laboratory experiments in which undergraduate student subjects (n=156) act as firm managers. Each manager is assigned to a group comprised of six firms and asked to make production and technology decisions that affect the profitability of his/her firm and ambient water pollution for the group. Preliminary results suggest that participants are significantly more likely to adopt a costly, pollution-reducing technology and accept lower profits when adoption provides assurance that those individuals will not be penalized for ambient pollution levels. By merging a conservation compliance framework with a penalty for ambient pollution, this work contributes to the literature on innovative NPS policies.