Using Prospect Theory to Improve the Design of Agricultural Subsidy Schemes

40 Pages Posted: 7 Aug 2019

See all articles by Neel Ocean

Neel Ocean

University of Leeds

Peter Howley

University of Leeds - Leeds University Business School (LUBS)

Date Written: August 6, 2019

Abstract

Existing agri-environment subsidy schemes have suffered from poor uptake. The prospect of the UK’s exit from the EU means that agricultural financial subsidies will likely need to be redesigned. This paper leverages insights from prospect theory to test three different aspects of policy framing, which we hypothesised will affect the decisions made by farmers in a policy context. Using a randomised quasi-experimental survey on UK farmers, we find evidence that mental accounting and loss aversion affects policy-related decision-making. Our findings have implications for the design of future policy, and specifically highlight the importance of (i) whether payments are integrated or segregated, and the need for a reduction in application burden; (ii) the labelling applied to agricultural funding schemes; (iii) and the importance of reference points in devising new scheme alternatives.

Keywords: prospect theory, framing, mental accounting, loss aversion, agricultural subsidy

Suggested Citation

Ocean, Neel and Howley, Peter, Using Prospect Theory to Improve the Design of Agricultural Subsidy Schemes (August 6, 2019). Leeds University Business School Working Paper. Available at SSRN: https://ssrn.com/abstract=3432955 or http://dx.doi.org/10.2139/ssrn.3432955

Neel Ocean (Contact Author)

University of Leeds ( email )

Leeds, LS2 9JT
United Kingdom

Peter Howley

University of Leeds - Leeds University Business School (LUBS) ( email )

Leeds LS2 9JT
United Kingdom

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