Does transaction costs expense create transaction gains for farmers participating in an agri-environmental scheme?

Abstract

Participating in agri-environmental schemes (AES) induces transaction costs for farmers, originating from time and money spent on tasks related to participation. High transaction costs may inhibit scheme participation, which would endanger the environmental goals aspired. To date, farmers’ transaction costs have been investigated from a cost-minimising perspective, implying fixed gains from participation. Nonetheless, participation contracts may contain negotiable parts. In such a case, especially, cost-constituting tasks undertaken by farmers’ own attempts could serve gain-maximising: Farmers can utilise additional information to increase their transactional gain, namely the payment. This paper addresses this question by investigating transaction costs of farmers participating in a site-specific grassland extensification scheme in Hesse, Germany, which contains negotiable features. Upon insights from information economics and transaction cost economics, the study discusses possible gains and tests the impact of farm and scheme-related features on both absolute and relative transaction costs, the latter conceptualised as payment/total transaction costs ratio. Results reveal that a higher transaction costs expense goes in line with a lower payment/transaction costs ratio; however, higher transaction costs expense predominates for particular farms features indicating dependency on AES income. Thus, voluntary transaction cost expenses seem to serve as a safeguard for securing participation-related income.

Keywords:

• transaction costs
• agri-environmental schemes
• Germany

Acknowledgements

The author wishes to thank two anonymous reviewers for helpful comments on an earlier version of the article.

Notes

1. Considering all German states, only Lower Saxony offers a TC compensation in the current funding period (Thomas et al. 2009).

2. Council Directive 92/43/EEC of 21 May 1992 on the conservation of natural habitats and of wild fauna and flora.

3. Effort for farmers only occurs when non-compliance is stated. This applied to only three farms. Thus, these inspection costs were not included in the total costs.

4. Note that the terms transactional gain and informational gain refer to distinct subjects. Transactional gain refers to the payment per TCs. Informational gains refer to benefits obtainable due to the expense of particular TCs. Conceptually, informational gains are an input factor which may increase the particular transactional gain.

5. However, if flat rate payments are cheaper to be administered, this might outweigh these welfare losses.

6. That is, the average amount of EVSS per ha of contract area.

7. However, they might be included in one of the other regressions.

8. Results were counterchecked by excluding organic farmers from the sample in order to control for the different premium calculation modes. However, the significant impacts persisted.

9. This may also imply that the ALRs attempt to ease participation-related effort for part-time farmers in order to secure a sufficient participation rate. In that case, it might be the ALRs who were locked in and face additional effort in order to carry out the transaction.