RT Journal Article
SR Electronic
T1 Sodbusting, Crop Insurance, and Sunk Conversion Costs
JF Land Economics
JO Land Econ
FD University of Wisconsin Press
SP 601
OP 622
DO 10.3368/le.90.4.601
VO 90
IS 4
A1 Miao, Ruiqing
A1 Hennessy, David A.
A1 Feng, Hongli
YR 2014
UL http://le.uwpress.org/content/90/4/601.abstract
AB We build a real option model that articulates sodbusting incentives arising from risk interventions in the presence of conversion costs. The model shows that risk interventions reduce expected costs of switching land use between cropping and noncropping activities and, hence, incentivize sodbusting. Based on data for south-central North Dakota over 1989–2012, our simulations show that offsetting 20% of a cropping-return shortfall by a risk intervention increases the sodbusting cost threshold, below which sodbusting will occur, by 41% (or $43.7/acre). Omitting cropping-return risk across time underestimates the sodbusting cost threshold by 23% (or $24.35/acre) and hence underestimates sodbusting caused by crop production. (JEL Q18, Q38)