Namrata Kala, MIT

Abstract:
The green revolution heralded unprecedented gains in agricultural productivity, but had unintended environmental consequences such as pesticide runoff and air pollution caused by residue burning. Agricultural residue burning is rising across large parts of Asia, fueled by increases in agricultural production and labor scarcity. Burning causes significant health and climate change externalities. Multiple policy responses have been implemented, from bans to capital subsidies, with limited success. In this paper, we test whether a payment for ecosystem services (PES) programs for residue burning can be successful in a weakly institutionalized setting. The particular design feature we focus on are whether paying a portion of the PES payment upfront and unconditionally can improve participation and compliance with the program. Upfront payments can relax liquidity constraints and act as a costly signal to increase trust in the program, but may reduce the marginal incentive to comply. We find that a standard PES program design has no effect on residue burning, but paying a portion of the money upfront reduces residue burning by 10 percentage points (over a control mean of 80 percent). Using pre-specified heterogeneity regressions, we find evidence of both liquidity constraints and distrust driving the effect. Varying the design features of PES programs (and conditional cash transfer programs more generally) to accommodate distrust and financial constraints can improve program efficacy.