Research and Development/Tech Change/Emerging Technologies,

Hawkes, Jerry

Libbin, James D.

Lillywhite, Jay M.

English

Research Papers in Economics

Western Economics Forum, Spring 2005 
                                                                                  19
 
Measuring Net Benefits Resulting from University-Industry Collaboration:  
An Example from the New Mexico Chile Task Force 
 
Jay M. Lillywhite, Jerry Hawkes, and Jim Libbin
1 
 
 
Introduction 
 
As universities face increasingly tight operating budgets, their need to justify expenditures on both basic 
and applied research is increasing (Oehmke, van Ee, and Ledebuhr 2000; Boyle 1997). At the same 
time, businesses face increasingly competitive business environments. For many, innovation is the key 
to productivity and survival. Universities and industries are joining forces to meet their respective 
needs, forming formal and informal collaborations (Scott et al. 2002). 
 
Analysts and policy-makers are becoming more interested in examining and understanding the 
relationships between academic research and economic activity. One area of growing interest is the 
measurement of net benefits generated through these relationships. To accurately measure the return 
to industry-university collaboration, researchers must consider all associated returns and costs (both 
direct and indirect). Benefits that may accrue from collaborative efforts include: (1) new scientific 
information, (2) increased educational opportunities for students, (3) new networks and stimulating 
interactions, (4) expanded problem-solving capacity, (5) new methodologies and technologies, (6) new 
firms and (7) expanded social knowledge (Scott et al. 2002).  
 
Valuing all direct and indirect benefits and costs associated with collaborative efforts is difficult, if not 
impossible. This paper outlines a methodology that can be used to measure one source of economic 
benefits -- the development of a new technology. The paper uses as an example a mechanical 
vegetable thinner developed through the collaborative efforts of the Southwestern chile pepper industry 
and New Mexico State University (NMSU).  
 
Background 
 
Acknowledging that industry leaders and participants possess a unique understanding of their industry, 
NMSU’s College of Agriculture and Home Economics adopted a task-force approach to working with 
the state’s industries. The task forces
2 are teams composed of industry and university professionals 
who work on industry-identified problems and challenges. The teams’ interdisciplinary nature has led to 
a holistic research and development approach. The work conducted by the task forces has, in general, 
had wide support from stakeholders. Teams working within the task-force framework are working with a 
strong sense of purpose (Schickedanz 2005).   
 
The New Mexico Chile Task Force was created in 1998 in response to economic difficulties facing the 
chile pepper industry. Members come from industry and academia and have varied backgrounds in 
agricultural science and production, business management, communications, and engineering. Task 
force members identify and implement procedures and technologies that will help the chile pepper 
industry remain viable in the face of increasing pressure from foreign-produced chile. One of the 
technologies developed by the task force is a mechanical vegetable thinner that may help chile growers 
reduce their production costs.   
 
                                                 
1 Lillywhite, Hawkes, and Libbin are with Department of Agricultural Economics and Agricultural Business, New 
Mexico State University. 
2 There are four College of Agriculture and Home Economics task forces: The Range Improvement Task Force, 
Water Task Force, Chile Task Force, and Wine Task Force.  Western Economics Forum, Spring 2005 
                                                                                  20
 
The mechanical thinner was developed by engineers at NMSU’s Manufacturing Technology and 
Engineering Center (M-TEC), under the leadership of the Chile Task Force. It selectively thins 
vegetable crops using computer-controlled, hydraulically operated knives that swing across rows in a 
back-and-forth motion to eliminate unwanted plants. Using NMSU Cooperative Extension cost and 
return estimates, Lillywhite et al. (2005) estimate that net returns attributable to cost savings generated 
from mechanical thinning adoption could be as high as $49 per acre.  
  
Analysis 
 
To estimate the net returns associated with mechanical vegetable thinner development, benefits and 
costs from three areas were examined (figure 1). These areas are benefits to chile growers (consumer 
surplus), benefits to the mechanical thinner manufacturer (producer surplus) and associated indirect 
costs and benefits to other chile industry stakeholders. As indicated above, a number of indirect costs 
and benefits may be associated with a particular project. Relative to indirect costs and benefits, we 
followed the work of Schmitz and Seckler (1970). We accounted for indirect costs associated with hand 
labor displacement as a result of mechanical thinner adoption by assuming those costs are equal to lost 
earnings.
3  While we recognize other benefits and costs (e.g., networking), we do not explicitly account 
for these benefits or costs in this analysis.  
    
Consumer Surplus Estimation 
 
Based on previous research by Lillywhite et al. 
(2005), we used present value estimations of per-
acre cost savings to estimate a representative 
grower’s willingness-to-pay for a mechanical 
thinner. Willingness-to-pay was estimated by 
calculating the mechanical thinner price that 
would just drive the present value of annual 
savings attributable to the thinner to zero. This 
price or willingness-to-pay point was assumed to 
represent a point on the grower’s demand curve 
for the mechanical thinner. Differences in savings 
have a direct relationship with a grower’s 
willingness to purchase a thinner. A primary 
determinant of annual savings, and thus the 
estimated willingness-to-pay level, is the number 
of acres over which the thinner is operated. A 
grower with 500 acres of chile (with an 
approximate per-acre savings of $49) would be 
willing to pay $119,425 per four-row thinner. The 
same grower with 400 acres (per-acre cost 
savings of approximately $48) would be willing to 
pay only $107,628 per four-row thinner. By arranging growers by descending chile acreage (and thus 
arranging growers by descending willingness-to-pay estimations), we can approximate the market 
demand curve for a mechanical thinner. Each of these willingness-to-pay points represents a point on a 
particular grower’s demand curve. The market demand for the mechanical thinner can be estimated by 
repeating the willingness to pay procedure for each chile producer (i.e., horizontally summing individual 
grower demand curves). Figure 2 depicts New Mexico chile farmers’ estimated demand curve for the 
mechanical thinner. 
                                                 
3  Schmitz and Seckler (1970) approximated consumer surplus by examining cost savings related to adoption of 
the mechanical tomato harvester. In this analysis, we directly estimate consumer surplus by estimating a 
representative grower’s willingness to pay for the thinner.  Additionally, we provide estimates of producer 
surplus that may accrue to the thinner manufacturer.  
 
Figure 1. Steps in Net Benefit Estimation 
 
1.  Estimation of Consumer Surplus 
•  Estimate present value of cost savings 
using Extension cost and return 
estimates. 
•  Estimate thinner price resulting in zero 
present value of cost savings. 
•  Repeat for acreage categories. 
2.  Estimation of Producer Surplus 
•  Estimate producer surplus as a 
percentage of sales. 
3.  Estimation of Indirect Social Costs (Lost 
Labor) 
•  Estimate labor cost using custom labor 
rates. 
•  Diminish annual labor costs as 
displaced labor is absorbed into 
economy. Western Economics Forum, Spring 2005 
                                                                                  21
 
The methodology described above was used to estimate the New Mexico chile industry’s market 
demand for the mechanical thinner. Using NMSU cost and return estimates (Hawkes et al. 2004)
4, cost 
savings and corresponding willingness-to-pay estimates were generated for a representative grower. 
These cost savings and willingness-to-pay estimates were projected to all growers within New Mexico 
using a 1997 USDA National Agricultural Statistics Service (USDA-NASS 2000) acreage categorization 
of New Mexico chile pepper farms.
5 The USDA-NASS data categorized 447 New Mexico chile farms 
within 21 different acreage levels (1 to 25 acres, 26 to 50 acres, . . .). Midpoints were used to estimate 
the average acreage within each category. These averages were then used in developing annual cost 
savings. Table 1 provides annual cost savings estimates and the present value of the savings (using a 
15-year life and a discount rate of 6.5%).    
 
   
 
The NMSU thinner was available commercially for the first time in Spring 2005. The initially agreed 
upon retail price for a four-row thinner was $37,525.
6  Using this estimated price and the demand curve 
derived above, potential consumer surplus generated by the development of the NMSU mechanical 
chile thinner is estimated at $1,822,013.   
  
Producer Surplus Estimation  
 
Without knowing specific manufacturer cost information, it is not possible to accurately determine 
producer surplus associated with the mechanical thinner. A simple producer-surplus estimate can be 
made by assuming constant marginal costs of production (an assumption that is reasonable given the 
likelihood that a limited number of thinners will be produced (63 thinners estimated above, based on 
                                                 
4  Readily available cost and return estimates and the underlying framework associated with those estimates 
provided by NMSU Extension were of great help in developing the net benefit estimates presented here.   
5  A breakdown of farms by chile acreage for the 2002 Census of Agriculture was not available.  
6  The price at which initial commercial machines would be sold was a factor in NMSU’s selection of a qualified 
manufacturer.  
Figure 2. Consumer surplus for four-row mechanical chile thinner (price equals $37,525). 
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 Western Economics Forum, Spring 2005 
                                                                                  22
 
NMSU cost and return estimates) and that the thinner product line will be a supplement to the 
manufacturer’s other equipment production.
7     
 
We used an estimated 5% return on net sales as a measure of producer surplus
8. If all chile producers 
deemed “willing-to-pay” actually purchased the thinner, the producer surplus would be $118,204.    
   
Indirect Social Costs 
 
To estimate the net benefits to society from mechanical thinner development, an accounting of costs 
associated with displaced labor must be made. For purposes of this analysis, costs of displaced labor 
are limited to hand laborers’ lost income.   
  
The NMSU cost and return budgets used to calculate individual grower willingness-to-pay estimate that 
a representative grower spends $70 per acre for contracted hand thinning. Using only farms and 
acreages where previous calculations showed that growers would be willing to purchase the thinner at 
the suggested retail price, the thinner would be adopted on approximately 13,342 acres. Multiplying this 
acreage level by $70, we estimated the total annual value of lost hand-thinning wages to be $933,940.  
 
$118,204
$1,822,013
$(1,652,972)
$(2,000,000)
$(1,500,000)
$(1,000,000)
$(500,000)
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
Producer 
surplus
Consumer 
surplus
Value of lost 
wages
 
 
Figure 3.  Components of estimated net benefits 
 
The annual cost of lost labor is expected to decrease over time as displaced workers find other 
employment opportunities.
9  For this analysis, the decrease is estimated at 50% per year for the study’s 
                                                 
7  The particular manufacturer chosen to build the mechanical thinner also produces specialized rock crushing 
equipment and has excess unused floor capacity in a facility recently purchased by the firm. It also is likely that 
the firm has some degree of excess labor capacity.    
8  As a point of reference, John Deere has averaged a 5.5% return on net sales over the last 10 years (John 
Deere 2004). We recognize that adoption of the thinner will occur over time, suggesting the need to discount 
surplus measures. Additional work related to estimating adoption rates and timing are underway.  
9  The assumption of decreasing labor costs appears reasonable as there are currently unfilled positions in many 
of the state’s chile processing facilities. While some positions may require skills not possessed now by field 
workers, the workers eventually could acquire the skills needed.   Western Economics Forum, Spring 2005 
                                                                                  23
 
15-year horizon. That is, over the 15-year horizon, we decreased the total value of lost hand-thinning 
wages by 50% annually. The present value of lost hand-thinning wages is estimated at $1,652,972.
10   
   
Net Benefits 
 
Using estimates of consumer surplus, producer surplus and the present value of lost hand-thinning 
labor wages, we estimated the net social benefit to the development of the mechanical thinner to be 
$287,245 (producer surplus = $118,204, consumer surplus = $1,822,013, and value of lost wages = 
$1,652,972). Net social benefits are approximately equal to initial research and development costs, 
estimated to be between $250,000 and $300,000.
11 It should be noted that this analysis estimated 
benefits and costs for chile produced only in New Mexico. Impacts resulting from adoption by Texas 
and Arizona producers, who are part of the regional chile industry, were not included.    
   
Conclusions 
 
Analysts and policy-makers are increasingly interested in measuring net benefits generated through 
industry-university relationships. A comprehensive measure of net benefits requires examination of a 
variety of benefits and costs associated with the collaborative relationship (e.g., value of increased 
educational opportunities for students). Quantifying many of these benefits (or costs) in economic terms 
is difficult. This paper demonstrated an approach to measuring a specific benefit resulting from 
industry-university collaboration, that of new technology development. 
   
The example used in the paper is that of the collaborative effort of the Southwestern chile pepper 
industry and NMSU to develop a mechanical vegetable thinner. Using the concepts of consumer 
surplus, producer surplus, and externalities (e.g., lost labor), we estimated the net benefit attributable to 
mechanical thinner development to be $287,245, approximately equal to the initial research and 
development investment costs. Additional work needs to be done to account for adoption and diffusion 
rates associated with the thinner and incorporate present value calculations based on adoption.       
 
References 
 
Boyle, P. 1997. What's the Impact?  ESP (Epsilon Sigma Phi) Connection 68:1-4. 
 
Hawkes, J.M., J.D. Libbin, J. White, A. Lyons, and R.P. Sullivan. 2004. 2004 Projected Crop Cost and 
Return Estimates, Dona Ana and Sierra Counties.  New Mexico Cooperative Extension Service Report 
# CRE04-CP-DA1, Las Cruces, NM.    
 
John Deere. 2005. Deere & Company 2004 Annual Report. Web site:  
http://www.deere.com/en_US/investinfo/media/pdf/reports/2005/2004annualreport.pdf.  
 
Lillywhite, J.M., J. Hawkes, J. Libbin, and R. Herbon. 2005. Economic Return to Adoption of Mechanical 
Thinning: The Case of New Mexico Chile.  Journal of the ASFMRA (in press).  
 
Oehmke, J.F., G. van Ee, and R. Ledebuhr. 2000. Impacts of High-efficiency Pesticide Sprayers on 
Michigan Apple Growers.   Michigan Agricultural Experiment Station Research Report # 566, East 
Lansing, MI.  
 
                                                 
10  Schmitz and Seckler (1970) assume an infinite life for displaced labor. Oehmke, van Ee, and Ledebuhr (2000) 
restrict lost earnings for displaced labor to one year.      
11 Herbon, R.  2005(March 1). Personal communication.  
 
 Western Economics Forum, Spring 2005 
                                                                                  24
 
Schmitz, A. and D. Seckler. 1970. Mechanized Agriculture and Social Welfare: The Case of the Tomato 
Harvester.  American Journal of Agricultural Economics 52(4):569-577. 
 
Schickedanz, J.G. 2005(February 25-26). New Mexico Vine and Wine Conference, Keynote Address.  
New Mexico Vine and Wine Society Annual Conference, Albuquerque, NM.   
 
Scott, A., G. Steyn, A. Geuna, S. Brusoni, and E. Steinmueller. 2002. The Economic Returns to Basic 
Research and the Benefits of University-Industry Relationships: A Literature Review and Update of 
Findings.  University of Sussex Office of Science and Technology, Brighton, UK. 
 
USDA National Agricultural Statistics Service. 2000. Special tabulation from the 1997 Census of 
Agriculture.    
 
Table 1. Cost savings for representative New Mexico chile pepper farms. 
Category 
Average 
Acreage 
Number of 
Farms 
Annual 
Savings 
Present Value 
of Savings 
Willingness to 
Pay 
1 – 25  13.0  257   $   (1,545.98)  $  (15,481.23)   $    6,636.47 
26 – 50  38.0  72         (234.27)     (2,345.91)      18,110.63 
51 – 75  63.0  30       1,095.30     10,968.12      28,279.10 
76 – 100  88.0  25       2,278.39     22,815.44      36,204.61 
101 – 125  113.0  14      3,597.97     36,029.51      44,162.65 
126 – 150  138.0  12      4,892.76     48,995.34      51,122.22 
151 – 175  163.0  4      6,231.75     62,403.79      57,650.43 
176 – 200  188.0  7       7,581.94     75,924.38      63,619.25 
201 – 225  213.0  5      8,942.22     89,545.98      69,099.11 
226 – 250  238.0  9     10,233.66   102,478.27      73,739.52 
276 – 300  288.0  4     13,350.50   133,689.81      90,816.16 
301 – 325  313.0  1      14,766.53   147,869.70      95,640.12 
376 – 400  388.0  1     18,468.08   184,936.42    105,773.02 
426 – 450  438.0  2     21,314.86   213,443.64    113,196.67 
501 +  501.0  4     24,714.45   247,486.62    119,546.50 
 
Table 2. Return on manufacturer sales (Assuming 5.5%). 
Category 
Average 
Acreage 
Number of 
Farms 
Manufacturer 
Return on 
Sales 
101 – 125  113.0  14   $  26,267
126 – 150  138.0  12  22515
151 – 175  163.0  4  7,505
176 – 200  188.0  7  13,133
201 – 225  213.0  5  9,381
226 – 250  238.0  9  16,886
276 – 300  288.0  4  7,505
301 – 325  313.0  1  $1,876
376 – 400  388.0  1  $1,876
426 – 450  438.0  2  $3,752
501 +  501.0  4  $  7,505

25-26). New Mexico Vine and Wine Conference, Keynote Address.

Agricultural Statistics Service.

assume an infinite life for displaced labor.

Economic Return to Adoption of Mechanical Thinning: The Case of New Mexico Chile.

Impacts of High-efficiency Pesticide Sprayers on Michigan Apple Growers. Michigan Agricultural Experiment Station Research Report # 566,

Mechanized Agriculture and Social Welfare: The Case of the Tomato Harvester.

The Economic Returns to Basic Research and the Benefits of University-Industry Relationships: A Literature Review and Update of Findings.

What's the Impact? ESP (Epsilon Sigma Phi) Connection

MEASURING NET BENEFITS RESULTING FROM UNIVERSITY-INDUSTRY COLLABORATION: AN EXAMPLE FROM THE NEW MEXICO CHILE TASK FORCE

MEASURING NET BENEFITS RESULTING FROM UNIVERSITY-INDUSTRY COLLABORATION: AN EXAMPLE FROM THE NEW MEXICO CHILE TASK FORCE

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