Does asset specificity influence transaction costs and adoption? An analysis of sugarcane farmers in the Great Barrier Reef catchments

ABSTRACT

A number of improved farming activities (IFAs) have been proven to reduce the sediment and nutrient impact of sugarcane farming on the world heritage listed Great Barrier Reef (Australia). Some of these also have the potential to improve the profitability of sugarcane farming. Despite this, sugarcane farmers remain reluctant to adopt these practices which suggest that perhaps the transaction costs of adoption are greater than the benefits. In this paper we classify IFAs as requiring investments in assets that are either highly asset-specific or of low asset specificity. Specificity relates to how transferable the investment is to other parts of the farming operation. Following a survey of sugarcane farmers we find that sugarcane farmers adopting IFAs considered to be of low asset specificity have the highest transaction costs. We provide some explanations for this result, some policy recommendations and also highlight some issues relating to the application of a theoretical construct such as asset specificity to real-world problem analysis.

KEYWORDS:

• Asset specificity
• improved farming activities
• transaction costs
• adoption
• Great Barrier Reef

Acknowledgments

The authors thank the sugarcane farmers of northern Queensland, Australia, who gave up their time to participate in this study and the Reef Rescue Integrated Paddock to Reef monitoring, modelling and reporting program and the CSIRO for funding. The authors also thank key staff at the regional bodies NQ Dry Tropics (NQDT), Reef Catchments and Terrain who assisted in survey design and implementation and Mark Poggio and Marcus Smith from the Queensland Government Department of Agriculture for assistance in categorising applications into levels of asset specificity. Finally we thank Laurent Verpeaux from NQ Dry Tropics for helpful comments on earlier drafts of this manuscript. All errors and omissions remain the responsibility of the authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. These tend to be contracts that may have political motivation or commitments additional to the agri-environmental outcomes. An example of this may be a commitment to increase spending in a region or to trial a land management technique over a certain period of time. A commitment to trial new land management practices and provide landholders with an experience in improved land management practices is certainly one motivation of the Reef Rescue Program.

2. Monitoring and reporting requirements will also impact on transaction costs and adoption. Extensive monitoring and reporting was not required in the case of analysis so is not discussed in detail in this paper.

3. NQDT provided details for 150 recipients, Reef Catchments provided details for 200 recipients and Terrain provided details for 197 recipients

4. In the Reef Rescue context, transaction costs were considered to be the costs of landholder time and resources expended in learning about the IFAs and the new equipment requirements and how these would apply on-ground as well as the cost of time and effort expended in applying for funding and reviewing and signing contracts.

5. There are very few studies that assess the relationship between asset specificity and transaction costs to the degree conducted in this paper. Where this has been done (see Rorstad, Vatn, and Kvakkestad (2007)), data was split based on low, medium and high levels of asset specificity. For this study, the sensitivity of the results to splitting data into the categories of low and high asset specificity was tested against the alternative of splitting the data into categories of low (22% of the data), medium (18% of the data) and high asset specificity (60% of the data) (low being transferable to three or more other areas of farm management, medium being an investment that was transferable to up to and including two other areas of farm management and high asset specificity being where the investment was not transferable other areas of farm management). Using the student's t test, it was found that the difference in mean transaction costs between low and medium asset specificity categories was not significant. Therefore, for ease of analysis, we only split transaction cost data into two groups – low and high asset specificity.

6. The average was used for all calculations as not all respondents reported their standard hourly rate. This was not surprising as many respondents are working on their own properties and rarely calculate the cost of their own labour time. Broader standard hourly rates were not available for comparison.

7. We costed a farmer's time based on the estimate of their on-farm labour costs. Farmer estimates of on-farm labour costs were used for two main reasons. First, based on discussions with farmers and extension experts it was revealed that most activities to apply for IFA funding occurred during the work day. Second, pre-testing the survey revealed that asking questions aimed at understanding the opportunity cost of time (i.e. how much would you need to be paid to work for one more hour on your farm? was either confusing to the survey respondent (this was a paper-based survey) or returned the on-farm labour cost.

8. The transaction cost of implementing the IFA include costs such as time to collect information about implementing the IFA and any direct expenses associated with information collection or in purchasing essential equipment to support implementation but do not include the cost of any direct equipment, etc. as this is a production/abatement cost.

Additional information

Funding

Reef Rescue Integrated Paddock to Reef monitoring, modelling and reporting program and the CSIRO.