AGRICULTURAL RESEARCH EXPENDITURES IN THE UNITED STATES: A PUBLIC GOODS PERSPECTIVE Jyoti Khanna, Wallace E. Huflman, and Todd Sandler* Absract—This paper oxesetsecomomettic evince om tno Giereat poi goed formalin ef agrelral esac pte publ an om preguct noel Asse tet forse eons equtns i proposed and apple for siege between the mo mode The peedure ed forte fot neti ing te rm 1981-195, ne atthe che 1. Introduetion HE threo snd one-half decades starting in 1950 witnessed about un 83% increase USS. agricultural output with only a sight (about 30%) increase in inputs under the control of farmers. Real expenditures on public agricultural research increased by about 110% over the same period. The search for and evaluation of sources ff agricultural output growth have prompted re= fecarchers to examine the returns to investments im agricultural research (and extension). Later studies have attempted to relate economic. politi= cal, and institutional factors to public decisions ‘on local funding of agricultural research. ‘The first group of studies consisted largely of ex-post evaluation of benefis from consume producers’ surpluses or marginal benefits ob- tained from production functions (sec Evenson, 1988), Though useful in public policy decision ‘making, these studies do little t0 explain public research expenditures, which, for the most part, were considered exogenous. The second group of studies treated expenditures on public agricul tural research 25. being endogenous, and at. tempted to explain the cros-sectional differences im terms of politcal and institutional factors ‘These models are suecessul in explaining difer- ‘ences in research expenditures across states, but Rect for pblation Mach 9, 1982 Revien aceptad {or publication Anus 10,199 " Gagte Univer: lon State Uri, and Towa State “Gps comments ere obioed on eater drt fs ‘nae Fler ao Janes Merdoch, Peas oitance oe ‘he low Agicltore and Home Ecoraies Enperimes a ‘hn acknowledged. ara! Faget Ra lT4L1 of the lows ‘Aeilare cad Home Esoeoesc Exess! Staion, De wale. Copia ©1988 are les amenable to explaining the growth of ‘expenditures over time. Some studies (Guttman, 1978) found interstate rivalry to increase expendi tures on agricultural research; other studies (Rose-Ackerman and. Evenson, 1985; Huffman and Miranowski, 1981) found evidence of free- riding on the part of the state governments Since agricultural research has public good characteris ties, the way itis inconporated into state govern- ‘ment decisions affects the proper specification of the demand function, Ultimately, we seek to ex plain public expenditures and the growth of these ‘expenditures over time. The objective ofthis paper isto present econo- iciric evidence on ono different public good for- rmulations of state government decisions on ogri- cultural research expenditures: pure public and joint product. The joint-produet model accommo- dates the specific feature of agricultural research conducted in the states where some benefits are private, in the sense they are state-specific, while ‘others are public and spill over to other states. TO capture a crucial uxpect of agricultural research, the made! includes voluntary (state) and noavol= tuntary (federal) contributions to state govem- ‘ment expenditures on agricultural research ‘Our analysis leads to a number of important results. First, we present methodology to distine suish between a group that provides itscif with a pure public good or a good with public and private characteristics, This test corresponds 10 fan equilibrium associated with a Nash allocative ‘process, and derives from the acutrality theorem (Warr, 1983) Previous tess for publiness relied ‘on & median yoter model and often required ad hoe restrictions on the form of underlying prefer fences Second, we group the states by geoc ‘mate conditions so a5 to identity the boundaries ssociated with interstate spillovers, Thitd, our study presents wo-stage least squares estimates fof demand equations, which overcome the simule Deco (i972) ane Dacey ard Montmruete 88D. The ‘Redan yt studes olen woune comlat pe and coms ‘toosties or pot Sone Geary ey fence. (267)268 tancity problem associated with public good anal- ses. Fourth, the model is tested for the 48 U.S. ‘tates using data from 1951-1985. An overwhelm- jing aumber of states have behavior consistent with the joint-product model, thereby highlight ing private benefit motivations behind giving. Fi- nally, the methodology presented here can be extended to test other public good formulations, and, henee, has general applica TL Background Public agricultural research in the United States ‘3 conducted by the U.S. Department of Agricul ture (USDA) in its own research agencies— Agricultural Research Service, Economic Re- search Service (ERS), Forestry Service—and by the sate agricultural éxperiment stations (SAES). Some of the USDA's own research activities are conducted in all states, and each state has ts own, ‘agricultural experiment station. Spillovers of vat fous types are a central characteristic of agriu tural fescarch. vast amount of experimental and farm experience has shown that the perfor- ‘mance of plants and animals (in which new tech- nology is frequently embodied) is altered by dif ferences in soils, temperature, moisture, and pho- toperiod characteristics of the producing environ- ment Locational spillovers are greater between t¥0 locations having similar gecelimstic characters- ties than between locations having dissimilar characteristics. Some of the benefits will spill into other states located in the same subregion, but the degree of spillover seems likely to decrease for states thet are located 2 greater distance apart and have greater diferences in geoctimatic characteristics. Evenson (1988, 1989) presents ‘some evidence that livestock research spills more fully over a larger area on average than crop research, Thus state-specific benefits of research ate relatively move important for op than live- stock research. ‘The federal government provides almost all of the funding for its own research activities at USDA research institutions. The state agricul tural experiment stations are funded by state governments from state tax receipts and from transfers from both the public and private sec tors. State government decisions are critical in the funding of SABS research and are 4 major ‘THE REVIEW OF ECONOMICS AND STATISTICS factor in total public researeh funding. For exam- ple, {a 1984 the total research budget of the USDA and SAPS system was $1,575 million: the USDA’s own research budget w2s §515.8 million, and the SAES system budget was $1,059 milion fo 67% of the cota (Huslman and Evenson, 1993, ch. 4). The SAES system received $181 million of USDA administered federal funds, but only S114 million wore Regular Hatch Act appropriations ‘that required matching dollarfor-dollar with nonfederal funds, Nonfederal funds of the SAES system exceeded by 85.1% the amount required to match Regular Hatch funds, ML The Theoretical Model Because states ase heterogencous in geaci- matic conditions and in their institutional budget linkages between the SAES and state legislature, a state-specific model is suggested. The theoreti ‘eal model developed here is the basis for our estimation of the empirical demand functions of state legislatures for public agricultural research. State governments demand private and. public goods (or inputs) using available resources. A [Nash model with a joint product is presented in which a collective activity provides two or more goods (Cornes and Sandler, 1984, 1986; MeOuire land Groth, 1985; Sandler 2nd Murdoch, 1950). Tn the model, public agricultural research (SAES and USDA) is the publidy demanded input that produces two final commodities. One is purely private among the states but purely public Within the state of origin Ge, the state's own residomts and producers benef, while the other commodity is public both within the state of ‘origin and to other states in a region, The private commodity is (Statespeciic) applied. research Inowledge gained and the regionwide public ‘commodity is basic esearch findings Each slate legislature is assumed to have a well-behaved neoclassical utility function, with possibly different parameters. The legislature's ‘utiliy depends on a pure public characteristic (Z,,), and a pure private characteristic (25), both ff which are produced from an input of public ‘agriculrural research (x,), and utility also. de- pends on an alternative composite, publicly pro- Vided, (nonresearch) statepecific characteristic Op: Um UZ te ¥ Edy aAGRICULTURAL RESEARCH EXPENDITURES where # is an environmental voriable, In the case of agricultural research, £, denotes geouti- ‘matic conditions that affeet utility and, conse quently, research between states. Within state f, the state's production of =, and £5 is represented simply as By HD > OFF <0, @ ay = fled > OA <0, @) where primes denote first and second derivatives. The variable x, denotes the i state's voluntary and noevoluntary contributions. Voluntary con tributions are those decided at the state level (Ge, SAES), while nonvoluntary contributions are federal agricultural research expenditures (ie., USDA) in the state, Since the public output =, i regionally public, each state receives its output of 2, and those ofthe other states so thatthe total Giaatiy of the public characteristic available for consumption by the # state legislature is Zur tut Zu, co) where Z,,= 4,2 isthe total quantiy derived fiom the other"sates and is termed an oulpat “spillin” to the i state, By (2), we have 4~ Ente) -"( Es). ie iat ©) In which A(-) is an agarepate function with A’ > 0 and i" <0, Equations ()~(5) imply that public ‘agricultural research outputs, produced in other states of the region, are a perfect substitute for the state's own public research output "The / state legislature's budget constraint is Peay + BY =I oy Y¥, depicts the state leistture’s expenditure on publicly provided nonrescatch soods (ez, Schools, prisons, and roads) In (6), P, is the price of public agricultural research, P, is'the price of the nonresearch good, and J, is the cial budget Lrevenmes) available to the {0 state legislature, including federal cash transfers To derive the (® state legislature's demand for regionwide voluntary and noavoluntary contribu tions for agricultural research, we transform the budget constraint in (6) into a “full income” The awumton is mae that eer! prin of ania lupl estch sland ya sonra) lpm {atom tbe ste Clu otler te ate bose ad fe? oul change the moc 269 constraint by adding the value of input spillins, PX, to both sides of (0, where X,— I, 4/4, ‘The full income constant is PX PY = 1+ R= A o where F, denotes full income. ‘The quantity X, enotes the total agricultural researeh yt, dee rived from both the voluntary contributions ofa of the states lenslatures and the federal sovern- tment contributions w public agricultural Search. As such, we denote X,= Ex By QA) and the identity x= X,~ X, the uty function can be expressed in terms of ts basic arguments or inputs: Y= U(An¥p X5E), @ here utility now embodies both the properties ofthe utility funetion and the production fane~ tions (+), (Iv and). Research spin, ae exogenous. Tr # fll income approach, state legislature chooses Y, and the egeegate quantity of , 30 as to maximize uty in (8) subject 19 the full ne ome constraint in (7) and to X, > X, This later Constraint incites that each state makes © pot twe contribution to agricultural research; data confirm. this zssumption. Under gute general Conditions, the frstorder conditions for optimal decisions on %; and Y; can be solved implicitly to dbton the leislature’s Gemane functions Apa dE PP o Yt = dy (FPP, Hi, Fi) (a0) In the joint-produet model, the demand for agsi- cultural research is driven by the price of aaicul- tural fesearch, the price of the publicly provided onresearch good, state government ful income, ‘variable, and an environmental varlable, ‘A Nash equilibrium js reached when each of the w legislatures in a region demands an alloc tion Xf and Y" such that _X? = X7, for = 1... and 1 L An equilibrium allocation is needed to proceed with the estimation of demand functions, because each state's research deci 5s interrelated through spillins. Since states pre- Serve much cutonomy over their decisions on agricultural researeh, a Nash assumption, in which ‘each siate views the spillins of research from other states and the federal government as given,