Oude Lansink, A.G.J.M.

Pietola, K.S.

English

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Modeling discrete technology choice : an application to standard and organic farming in Finland

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Briefs on Further Research 125 
Modeling Discrete Technology Choice: An Application to Standard 
and Organic Farming in Finland 
Kyosti S. Pietola' andAtfons Oude Lansink? 
' Agricultural Economics Research Institute, P.O. Box 3, 00411 Helsinki, Finland 
* Wageningen University, Farm Management Group, Hollandseweg 1, 6706 KN 
Wageningen, The Netherlands 
E-mail: kyosti.pietola@mmm.fi 
Finland has a long experience in implementing a public policy program to promote organic 
fanning. Farmers' choice alternatives under the Finnish incentive program are characterized 
as follows. A farmer, who is currently applying the standard production technology, is facing 
a choice between two mutually exclusive alternatives. At the beginning of each year he 
decides whether to sign a five-year contract and switch to organic farming or to continue 
standard farming while retaining the option to switch later. Similarly, a farmer currently 
farming organically decides whether to switch back to standard farming, or to continue 
farming organically while retaining the option to switch later. 
These discrete choices are solutions to a multi-period, dynamic optimization problem in 
which the future returns are stochastic. Therefore, estimating the farmer's choices in the 
structural form requires a solution to two distinct problems: (1) the solution to the stochastic 
dynamic optimization problem on which these choices are based; (2) the estimation of choice 
probabilities together with the underlying structural parameters of the behavioral equations. 
In this study1, the dynamic optimization problem is solved by first defining choice 
specific value functions that obey the Bellman equation and next numerically iterating on the 
Bellman equation backwards, starting from the terminal period. The maximized random 
return streams are simulated using crude Monte Carlo simulation. These maximized return 
streams then determine the next period optimal value functions. A Probit-type endogenous 
switching model using Maximum Likelihood Estimation (MLE) is used to estimate the choice 
probabilities. 
The results suggest that decreasing output prices and increasing direct subsidies have 
been triggering switches to organic farming. Therefore, income neutral policy reforms, which 
decrease price support and compensate the resulting income losses by direct income transfers, 
increase incentives to switch into organic farming. It is also found that the switch is more 
likely on farms having large land areas and low yields and less likely on farms with intensive 
livestock or either labor or capital intensive production. 
Keywords: Technology Choice, Organic Farming, Dynamic Programming, Switching Model 
A preliminary paper on this work has been presented on the 65* EAAE Seminar. The revised final version is 
forthcoming in the European Review of Agricultural Economics, Volume 28. 


Modeling discrete technology choice : an application to standard and organic farming in Finland

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