Uncertainty, self selection and the design of subsidies: Evidence from Zambia

• Environmental and Energy Economics Workshop

Date and Location

Wednesday, October 9, 2013, 4:10 PM - 5:40 PM
ARE Conference Room, 2102 Social Sciences and Humanities

Abstract

In the absence of uncertainty, Pigouvian subsidies to increase the private provision of public goods can achieve the same level of cost effectiveness if they are conditioned on the acquisition of inputs (take-up) or on outcomes. If, on the other hand, potential adopters face uncertainty in the costs or benefits of implementation then the direct link between take-up and outcomes is broken, and these two instruments pose different tradeoffs between participation and targeting. Cost-effectiveness may favor one or the other instrument depending on the cost of monitoring outcomes. We examine these tradeoffs in the context of a field experiment that exogeneously varies the level and the conditioning of a subsidy associated with adoption of agroforestry trees. The variation in subsidies identifies a structural model of intertemporal decision making under uncertainty that we use to inform welfare estimates.