Adopting Bio-Energy Crops: Does Farmers’ Attitude toward Loss Matter?

This paper investigates farmers’ willingness to grow bio-energy crops (namely, miscanthus and switchgrass) while accounting for their preferences toward loss. We model a representative farmer’s optimal land allocation problem between conventional crops and bio-energy crops by employing the prospect theory. Numerical simulation is conducted for 1,919 U.S. counties east of the 100th Meridian that have yield data for corn and for at least one bio-energy crop. Results show that all else equal, if farmers are credit constrained then accounting for loss aversion will decrease the miscanthus production but increase switchgrass production. If farmers are not credit constrained, however, then accounting for loss aversion only has small impact on bio-energy crop production, indicating that the availability of credit mitigates the effect of farmers’ loss preferences. We also find that biomass production on marginal land is less sensitive to farmers’ loss aversion than production on high quality land is, which underscores the importance of marginal land in providing biomass for the bio-energy and bio-product sector. Moreover, results show that impact of loss aversion is smaller when interest rate is low as compare to scenarios under which interest rate is high. Geographical configuration of biomass production under various loss aversion, credit constraint, and interest rate scenarios are examined as well.