An Empirical Structural Model of Productivity and the Conservation Reserve Program Participation

The Conservation Reserve Program (CRP), which provides financial incentives for landowners to idle erodible and marginal farmland, has contributed to a number of environmental benefits that otherwise would have not been achieved. However in the last few years CRP faced a number of new challenges as record-high crop prices significantly affected landowners’ interests to participate in the program. Despite an extensive literature on CRP, we lack evidence on how landowners react to changes in agricultural market conditions and CRP payment rates and hence how it affects the program enrollment and cost. In this paper, we attempt to investigate landowners’ incentives for CRP participation focusing on the linkage between farmers’ CRP payment bids and unobserved agricultural productivity. We develop and estimate an empirical structural model to examine the manner in which agricultural productivity, market conditions, and CRP payment affect landowners’ land use decisions. A novel identification strategy is employed to control for endogeneity and self-selection. The parameter estimates are used to simulate how changes in agricultural prices and CRP payment influence the program enrollment and cost.