User Costs of Soil Erosion and Their Effect on Agricultural Land Prices: Costate Variables and Capitalized Hamiltonians

Abstract

Whether land markets efficiently capture the degradation in soil quality caused by erosion is an empirical question. But the degree of efficiency cannot be ascertained from statistical estimates alone. These must be compared to the effect erosion would have on the value of land in a perfectly functioning market. The purpose of this paper is to provide the needed benchmark for comparison. Will an inefficient land market cause farmers to overexploit the soil? Do renters erode more than owners? How much does erosion cost? If soil is becoming more valuable over time, how should current decisions be altered to conserve soil for future generations? These are ancillary questions we will address as well. We begin by sketching a model for the dynamically optimal adoption of soil-conserving technologies, crop rotations, pesticide regimens, and other management practices. In a special but important case, we are able to calculate the difference in land prices that would be observed in a completely inefficient versus a perfectly efficient market. A sensitivity analysis is performed. Finally, we draw upon the theoretical and empirical results to discuss estimation strategies and offer concluding remarks.