Informational Cascades and Technology Adoption: Evidence from Greek and German Organic Growers

Informational Cascades and Technology Adoption: Evidence from Greek and German Organic Growers

The present study aims to empirically analyze the competing effects of social interactions and conversion subsidies on the adoption of organic farming practices.

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Published in: Food Policy

This plenty of empirical evidence clearly underlines that if the diffusion of technological innovations is important for the viability and competitiveness of farming operations, it is rather inevitable to find ways to create informational cascades among the rural population. For European agriculture this is even more vital given its current course towards restructuring the farming sector throughout the EU. The high costs of the farm support programmes, the structural over-supply of agricultural commodities resulting in falling farm income and indebtedness, the environmental damage (through the increased use of chemical inputs) and, the loss of consumer confidence in food safety and quality are issues that both past and future reforms of the CAP should take into account. In this context, organic farming can provide an appealing option at least for some types of farming activities in the European agricultural sector. In summary, organic farming is based on the view that agriculture is a form of agro-ecosystem management, designed to promote sustainable supply of food and other products to the home market. Thus, the farm is considered as a balanced unit, where production, environment and human activities are integrated. Chemical fertilizers and pesticides are replaced by organic forms of fertilizer and non-chemical crop protection strategies minimizing pollution from the farm.

This particular farming technology has been actively promoted in the context of the CAP dur- ing the last decades, via mainly subsidy-driven policies (summarized in EU Regulations 1257/1999 and 834/2007). Direct subsidy schemes requiring conversion of at least a portion of a farm’s land and continued organic production are available in various European countries. Lampkin and Padel (1994) and Pietola and Oude Lansink (2001) analyzed these policy schemes and found conversion subsidies expanded organic farming significantly throughout Europe at least in the early years. Indeed, financial incentives such as direct subsidies (via which the central government essentially ”shares” the risk of adoption) are common and effective means of overcoming farmers’ adverse per- ceptions. These types of incentives are however costly, especially if adoption depends primarily on perceptions about future yields. As the recent theoretical and empirical evidence suggest, a promis- ing and equally effective way to promote organic adoption in the farming sector is the provision of informational incentives that revise producers’ perceptions about the profit-effectiveness of new organic farming technologies. Although fixed initial costs are incurred, informational incentives may be less costly than financial incentives in the long-run as information spreads throughout the rural communities. While both information and subsidy policies speed up adoption and diffusion of new technologies, Stoneman and David (1986) have shown that subsidy policies may yield welfare losses in the form of income transfers from other sectors of the economy. Moreover, in their study analyzing EU policies related to organic farming Lohr and Salomonsson (2000) found, in contrast to Lampkin and Padel (1994), that market services and information sources rather than subsidies are more effective in encouraging organic adoption throughout the EU.

In light of the above and building upon the theoretical developments of Foster and Rosenweig (1995), Munshi (2004), Bandiera and Rasul (2006) and, Weber (2012), the objective of this paper is to offer an empirical evaluation of the effects that informational and financial incentives have on a farmer’s decision to adopt organic farming using two different samples of olive and cereal growers in Greece and Germany, respectively. Based on Roger’s (1995) definition of social networks in rural areas as well as on profitability considerations we suggest two alternative indices for capturing empirically the effects of social learning in individual adoption decisions. Empirical results suggest that indeed informational spillovers are more important factors fostering the adoption of organic farming technology in both Greece and Germany than the conventional policy tools of conversion subsidies. 

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