Experimental Evidence on Policy Approaches That Link Agricultural Subsidies to Water Quality Outcomes

Improving water quality in agricultural landscapes is an ongoing challenge, and most agri-environmental programs in the United States rely on voluntary adoption of conservation practices. Conservation-compliance initiatives require producers to meet specific conservation standards to qualify for payments from farm programs. However, these requirements do not require actual improvements in observed water quality. In this study, we introduce policies to reduce nonpoint source pollution that link eligibility for agricultural subsidies to compliance with water quality goals. We then use economic laboratory experiments to provide empirical evidence related to the performance of these policies. In the policy treatments, participants risk losing some or all of their subsidies if the ambient pollution level exceeds an announced target. A novel feature of our experiment is that we test a policy treatment that ensures that no subsidies are lost if a producer implements a verifiable conservation technology that reduces emissions. In these experiments, policies that link the receipt of subsidies to ambient water quality nearly achieve the socially optimal level of pollution. The results suggest that water quality policies that rely on the threat of subsidy reductions are a potentially viable option for reducing aggregate water pollution. Although a policy that allows polluters to avoid potential losses by implementing a verifiable conservation technology could increase political support for ambient-based policies, our results suggest that, depending upon the magnitudes of social damages from emissions and the cost of implementing a conservation technology, such policies may be less cost-effective for a comparable reduction in pollution.