Explaining "Irrational" Land Use: Risk Aversion and Marginal Agricultural Land

When land users make dynamic land conversion decisions to maximize profits, persistent dedication of marginal land to agricultural uses can be explained as a consequence of risk aversion and expected capital gains. Land conversion increases in response to cost-sharing, rental payments, and technical assistance that reduces uncertainty about land benefits. When correlation between benefits is nonpositive, risk aversion leads the land user to diversify land among uses. Unless subsidy payments outweigh the sum of risk and capital gains costs, payments which appear potentially successful may fail. When payments succeed, the cost of accomplishing acreage targets may be higher than anticipated.