On the use of cost-benefit analysis for the evaluation of farm household investments in natural resource conservation

Abstract

Farm households in developing countries are generally credit constrained. This forces them to simultaneously take production and consumption decisions. In this paper, a two-period lifecycle model of the farm household is constructed and the household's investment response to changes in land and agricultural output prices are derived theoretically. It is shown that in the absence of credit markets household responses to exogenous price changes may differ from the predictions of cost–benefit analysis. Farm household responses are also derived for the case where price increases for land and agricultural output are accompanied by the introduction of a credit market. For this case the results show that farm household reactions are in accordance with predictions made by cost–benefit analysis. An empirical case study from Bénin underscores the relevance of considering access to credit in establishing whether investments in soil conservation are beneficial to farm households.