UMD research estimates the dollar value of hurdles to homeowners enrolling in cost-sharing programs and shows how much they reduce incentives.
A rain garden helps absorb rainwater and reduces pollutants flowing into local waterways.
Image Credit: Rain Dog Designs
Rainwater flowing from lawns, roofs and paved surfaces not only causes flooding and erosion, but it washes lawn chemicals and mud into local streams that feed larger water bodies like the Chesapeake Bay. Many local governments and private environmental organizations offer cost-sharing programs, which pay homeowners a percentage of the costs to install rain gardens, rain barrels and conservation landscaping designed to retain or absorb stormwater.
But participation in these programs is generally low, and previous studies have shown that the time and effort required of a homeowner to sign up can be a barrier to enrollment. Now a University of Maryland environmental economist and his colleagues have put a dollar value on those enrollment barriers, estimating how much the various features of a cost-share program reduce the incentive of that program to a homeowner. The study, which was published in the American Journal of Agricultural Economics, provides a model decision makers can use to design better incentive programs and increase enrollment.
“When you have these incentive programs, some of the cost-sharing incentive is dissipated through what we call transaction costs, things such as the effort it takes to complete the application process, find a contractor, receive a rebate payment, or obtain final inspections, and such,” said David Newburn, an associate professor in the Department of Agricultural and Resource Economics at UMD and co-author of the study. “We decompose the whole enrollment process into discrete parts and quantify each barrier to show its impact on the incentive.”
By quantifying every program feature according to its transaction cost to the homeowner, the researchers were able to develop a model to more accurately estimate the likelihood of enrollment in different types of incentive programs.
Newburn and his colleagues based their analysis on surveys of 1,700 homeowners with yards throughout the Baltimore metropolitan area. The surveys captured homeowner willingness to participate in a variety of proposed incentive programs for stormwater practices such as rain gardens or conservation landscaping. The proposed programs varied in features like the percentage of costs shared; whether the homeowner received the incentive up front or was issued a rebate after installation; whether homeowner had to find a contractor on their own, choose from a recommended list or was assigned a contractor; whether the homeowner was responsible for submitting initial application paperwork or obtaining final inspection approval or the contractor took care of it. The team created 48 different types of programs based on various combinations of these features.
Their survey data revealed that each feature requiring effort from the homeowner reduced the willingness of homeowners to participate in a predictable way that could be translated into a dollar value and subtracted from the cost-share incentive. The adjusted dollar amount could be used to estimate overall homeowner willingness to participate in a given program.
For example, if a cost-share program paid $9.38/sqft (75% of the installation costs) for a rain garden, but made the homeowner pay upfront, issuing a rebate later, willingness to participate on average dropped to the same level as if the program paid up front but only paid $6.70/sqft. If the homeowner was responsible for the application paperwork, the value of the incentive dropped again by $2.05, and it dropped another $2.80 if the homeowner had to apply for the final inspection. When the homeowner had to manage these three enrollment barriers in combination, the cost share value of such a program was whittled down to a mere $1.85/sqft (less than 15% cost share).
Their findings highlight the degree to which current estimates of willingness to participate in incentive programs are skewed by models that don’t account for one or more of these transaction costs. Their model also identified the types of changes to existing incentive programs that would result in the most efficient balance between program costs, transaction costs and homeowner willingness to participate.
“We identified things that don’t matter as much, like finding a contractor on your own,” Newburn said, “But then we saw which things really do matter and by how much. It’s important to note that if we had turn-key programs, like the solar industry does, for instance, where contractors handle the application paperwork and inspections, that would do a lot to increase adoption rates of stormwater management practices.”
This research was supported by the National Science Foundation (Award No. 1615560). This story does not necessarily reflect the opinions of this organization.
The paper, “Modeling Transaction Costs in Household Adoption of Landscape Conservation Practices,” Robert J. Johnston, Tom Ndebele, and David A. Newburn, was published June 8, 2022, in the American Journal of Agricultural Economics.
