Many policymakers advocate heavy subsidies to boost fertilizer use and raise agricultural productivity. In contrast, most economists assume that farmers already take advantage of potential profit opportunities, and argue that heavy subsidies are distortionary, environmentally unsound, regressive, and lead to politicization and inefficiency in fertilizer supply. In earlier work, we show that fertilizer is profitable for farmers in Western Kenya. Yet, usage is low, pointing to possible inefficiencies. In this paper, we build a model with a small fixed cost of purchasing fertilizer in which some farmers are present-biased and partially naïve. Farmers therefore procrastinate, postponing purchasing fertilizer until proceeds from the harvest are spent. Consistent with the model, small time-limited reductions in the cost of purchasing fertilizer at the time of harvest induce substantial increases in fertilizer use, as much as considerably larger price cuts later in the season. Such small timelimited discounts could help present-biased farmers commit to fertilizer use without substantially distorting decisions of non-procrastinating farmers and incurring other costs of heavy subsidies.
American Economic Review
May 01, 2008