Three essays on heterogeneity and asymmetric information in land economics

Date
2019
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University of Delaware
Abstract
Social planners use different policy tools to correct market failures arising in land economics. Sometimes, social planners use reverse auctions to retire or reserve farmland from production. Other times, social planners offer incentive contracts for the adoption of best management plans. Taxes may be used to influence landowners’ development decisions, too. Heterogeneous attributes of landowners as hidden information create challenges to social planners in designing cost-effective policy tools. Landowners have better information and make use of this advantage to maximize private benefits, which limits the performance of these policies, measured by different metrics. The three essays evaluate those policy tools and investigate the heterogeneity and asymmetric information problem in land economics. ☐ The first essay investigates heterogeneous land develop decisions under two property taxes. Land value taxation (LVT) is thought to enhance the efficiency of property taxation by raising revenue without distorting land improvement incentives. A related set of results suggest that LVT promotes economic development and reduces urban sprawl. With heterogenous induced-value setting, this research constructs a spatial economic model of a virtual urban area to extend the only existing LVT experiment under behavioral economics settings, in which participants act as property developers who invest to build “out” (by employing more land) and build “up” (by adding building floors) in a dynamic setting. In addition, the experiment uses a voting treatment with information nudge, in which participants could vote for their preferred tax plan, capturing LVT’s political acceptability in the laboratory. Experiment results show that experiment participants adhere to their optimal tax preference and building choices for most of the time and LVT does lead to higher earnings to landowners, higher tax revenues, and denser cities as the theoretical models predict. However, experiment participants’ voting choices can also be swung by information nudge that does not affect their earnings directly. ☐ Reflecting on the low participation rates of certain incentive programs, the author suspects that rigid eligibility requirements and strict rules stop farmers from participating in and further limit the performance of these programs. A theoretical model is constructed to compare the performance of fixed payments and reverse auctions under different levels of flexibility. Heterogeneous willingness-to-accept (WTA) is introduced as hidden information. Non-additional choices are defined as choices with negative WTA, which are used to discover the potential trade-off between flexibility and additionality. A neutral framed lab experiment with induced value is designed and conducted to support the model. Preliminary experiment results show that program flexibility affects program performance through the mechanism and through participants’ behavior change. A more flexible contract leads to higher cost-effectiveness, but also more non-additional behaviors. Although the internal validity of the experiment is significant from regression analysis, the external validity is questionable as other neutral framed lab experiments. ☐ To enhance the external validity and address the asymmetric information problem in an empirical setting, the third essay investigates the effects of cost-share payments on the adoption of cover crops in Maryland and Ohio. A three-stage theoretical framework is constructed to explain the sequential outcomes of planting cover crops, cost-share enrollment, and the share of acreage under cover crops as the intensity of adoption. This research used a double-selection model with incomplete classification to test and correct the potential selection bias in estimating the intensity of adoption. The model is estimated with survey data from Maryland and Ohio in the 2017-2018 planting season. Controlling the self-adoption rate as the counterfactual of paid-adoption, the cost-share programs in Maryland is estimated to increase cover crop adoption by additional 21.85 percentage points of farmland for enrolled farmers on average, while the estimated effects in Ohio is lower at 19.03 percentage points, which can be attributed to the lower per acre payments and a payment cap. Furthermore, an out-of-state estimation predicts a 27.74 percentage points increase in acreage if Ohio can employ a program similar to the one in Maryland. ☐ Although the three essays are constructed under different contexts, the economic theory of asymmetric information and heterogeneity connects the three essays. The first essay introduces an experiment design testing information nudge in the landowners’ tax preference and land development decisions. The second essay shows how rational landowners with heterogeneous WTA as hidden information response to different policy tools in a lab environment and how policy tools perform with respect to behavior change. The second essay brings the asymmetric information problem from the hypothetical lab environment in the first essay to the farm fields and predicts the effectiveness of cost-share programs using survey responses from farmers. The combination of lab experiments and empirical method contributes to a better understanding of the asymmetric information and heterogeneity problem in land and agricultural economics.
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