Market-based instruments for risk-averse farmers: Rubber agroforest conservation in Jambi Province, Indonesia

Abstract

Environment and Development Economics 22: 133–155 © Cambridge University Press 2016 doi:10.1017/S1355770X16000310 Market-based instruments for risk-averse farmers: rubber agroforest conservation in Jambi Province, Indonesia UTKUR DJANIBEKOV Institute for Food and Resource Economics (ILR), University of Bonn, Meckenheimer Allee 174, 53115, Bonn, Germany. Tel: +49-228-732892. Email: u.djanibekov@ilr.uni-bonn.de GRACE B. VILLAMOR Center for Development Research (ZEF), University of Bonn, Germany. Email: gracev@uni-bonn.de Submitted 28 November 2015; revised 16 June 2016, 15 August 2016; accepted 21 September 2016; first published online 1 December 2016 ABSTRACT. This paper investigates the effectiveness of different market-based instru- ments (MBIs), such as eco-certification premiums, carbon payments, Pigovian taxes and their combination, to address the conversion of agroforests to monoculture systems and subsequent effects on incomes of risk-averse farmers under income uncertainty in Indonesia. For these, the authors develop a farm-level dynamic mean-variance model combined with a real options approach. Findings show that the conservation of agrofor- est is responsive to the risk-aversion level of farmers: the greater the level of risk aversion, the greater is the conserved area of agroforest. However, for all risk-averse farmers, addi- tional incentives in the form of MBIs are still needed to prevent conversion of agroforest over the years, and only the combination of MBIs can …

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