Controlling an Imported Disease in California Lettuce: A Dynamic Structural Econometric Model of Externalities and Short- vs. Long-Term Decision-Making

When faced with managing a disease that requires future investment, short- and long-term decision-makers may have different incentives and choose to manage the disease differently. I define short-term growers as those who appear on a field in my data set for only one year. I define long-term growers as those who appear on a field for the duration of my data set. I analyze Verticillium wilt management for lettuce crops in Monterey County to determine the impact on welfare of short-term and long-term growers, and to examine whether it is possible to internalize the intertemporal externalities between short-term growers and between short-term and long-term growers.;My objectives were to model farmers' dynamic decisions to maximize the present discounted value of gross expected returns for long-term growers ('owners') and short-term growers ('renters') related to their crop and fumigation decisions. This model is based on Rust's (1987; 1988) nested fixed-point maximum likelihood estimation model. This model has been adapted for many applications, including agriculture by Scott (2013). I also adapt the work of De Pinto and Nelson (2009). I compare the decision-making of growers with different time horizons: an infinite horizon for long-term growers and a finite horizon for short-term growers. This model generates parameter estimates with direct economic interpretations. I use the parameter estimates to simulate counterfactual scenarios regarding renting and owning. I determine whether renter contracts internalize the intertemporal externality that a renter's decisions today impose on future renters, and the implications of renting versus owning land on the spread of the disease and welfare.;I use a dynamic model for several reasons. First, the control options (fumigation, planting broccoli, and not planting spinach) are investments that require long-term planning for future gain. Second, these investments take place under uncertainty. The investments are irreversible, there is uncertainty over the reward from investment, and farmers have leeway over the timing of investment. Thus, there is an option value to waiting, which requires a dynamic model (Dixit and Pindyck, 1994). A third reason for using a dynamic model is that the long-term growers and short-term growers have different planning horizons, implying that short-term growers may be less willing to make the long-term investments needed to control Verticillium wilt. A dynamic model with different time horizons for long-term and short-term growers best enables me to compare these two types of growers. A fourth reason to use a dynamic model is that the microsclerotia can persist in the soil for fourteen years.;In my model, the decision-maker is a grower who chooses actions (crop and fumigation) to maximize the present discounted value of his entire stream of payoffs (gross expected returns). Actions are discrete, mutually exclusive choices the grower might make (e.g. plant lettuce, plant strawberries and fumigate, no crop). The decision rule for the grower's optimal choice depends on state variable such as the price of the crop, the crop planted in the previous month, and whether control options have been taken previously. I apply my model to the Pesticide Use Reporting (PUR) data on growers in Monterey County over the period 1993 to 2011 and follow Rust (1987, 1988) to solve for the value function and the choice probabilities, and to estimate the parameters in the per-period payoff function. I use bootstrap techniques to estimate standard errors.;My results show that for long-term growers, methyl bromide is an effective control option, but it requires growers to incur costs for potential additional future gain to lettuce. Planting broccoli is an effective control option as well. For short-term growers, contracting may only partially internalize the intertemporal externality. In my results, renters are not rewarded for planting broccoli or fumigating with methyl bromide, but these control methods lead to future benefits for future renters. The long-term decision-making of long-term growers yields higher average welfare per grower-month and more use of the control options, likely due to differences in the incentives faced by owners versus renters, differences in the degree to which the intertemporal externality is internalized by owners versus renters, the severity of Verticillium wilt, the effectiveness of control options, rental contracts, and a longer planning horizon.;I then use the results from my model to analyze the externality between growers and seed companies. I estimate the grower's benefits and spinach seed company cost to testing and cleaning spinach seeds in order to reduce the level of microsclerotia. I compare the status quo (growers and seed companies independent) to a vertically integrated industry, where one company produces spinach seeds, as well as spinach, lettuce, and other crops. This internalizes the various externalities (both positive and negative) the different crops have on lettuce. (Abstract shortened by UMI.).