CONTRACT INCENTIVES AND EXCESSIVE NITROGEN USE IN AGRICULTURE

By: Preckel, Paul V.; Shively, Gerald E.; Baker, Timothy G.; Chu, Mei-Chin; Burrell, Jessica Eide
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Preckel, Paul V.; Shively, Gerald E.; Baker, Timothy G.; Chu, Mei-Chin; Burrell, Jessica Eide, CONTRACT INCENTIVES AND EXCESSIVE NITROGEN USE IN AGRICULTURE, Journal of Agricultural and Resource Economics, Volume 25, Issue 2, December 2000, Pages 468-484

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This study examines incentives for input use under tournament contracts. We analyze implications of contract design for nitrate-based environmental externalities generated by agricultural producers. Outcomes are compared from contracts awarded by tournament to those from fixed-payment contracts. Our findings show contract insecurity can distort input use. The model developed in this analysis is applied to a region of the U.S. where tournament-based production is prevalent and groundwater contamination is a problem. We find contract insecurity increases nitrogen use by about 12%, resulting in a 17% increase in nitrate leaching. Implications for contract modification to reduce environmental externalities while maintaining contract incentives are discussed.
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