Does Organic Farming Provide a Viable Alternative for Smallholder Rice Farmers in India?

: Smallholder rice farming is characterized by low returns and substantial environmental impact. Conversion to organic management and linking farmers to fair trade markets could offer an alternative. Engaging in certiﬁed cash-crop value chains could thereby provide an entry path to simultaneously reduce poverty and improve environmental sustainability. Based on comprehensive data from a representative sample of approximately 80 organic and 80 conventional farms in northern India, we compared yield and proﬁtability of the main rotation crops over a period of ﬁve years. Contrary to the widespread belief that yields in organic farming are inevitably lower, our study shows that organic farmers achieved the same yields in cereals and pulses as conventional farmers, with considerably lower external inputs. Due to 45% lower production costs and higher sales prices, organic basmati cultivation was 105% more proﬁtable than cultivating ordinary rice under conventional management. However, since holdings are small and the share of agricultural income of total household income is declining, conversion to organic basmati farming alone will not provide households a sufﬁciently attractive perspective into the future. We propose that future efforts to enhance the long-term viability of rice-based organic farming systems in this region focus on diversiﬁcation involving higher value crops.

Introduction
Uptake of organic practices is growing worldwide, particularly among smallholders in lowand middle-income countries. India plays an important role in this development, hosting 835,000 of a global total of 2.7 million certified organic farms in 2016 [1]. The shift towards organic farming raises questions not only about sustainability but also about profitability and food security. A global meta-study found that organic farming systems produce lower yields, but they are more profitable and environmentally friendly in terms of soil quality, minimized energy use, biodiversity and minimized water pollution, compared with conventional agriculture [2]. An important mechanism to enhance profitability is farm-gate premium prices. Especially in combination with reduced production costs, Sustainability 2018, 10 an average yield drop of 10-18% can be more than compensated, resulting in a net profitability 22-35% higher than conventional agriculture [3]. Critics argue that due to lower productivity, a wider adoption of organic agriculture would exacerbate the challenge of providing sufficient food to feed the world [4][5][6]. However, transition processes are always long-term and gradual, requiring models that incorporate multiple factors and scenarios that include advances in technological options, for example in resource use efficiency, and other changes affecting food security, for example climate change resilience and reduction of food waste [7,8]. Moreover, ongoing changes in the agricultural sector need proper monitoring and assessment to better understand the dynamics of the transition process in particular places. Here, we present results of such an assessment, based on a study of rice farming in northern India. Rice-based farming systems provide a suitable study field to investigate the question whether conversion to organic farming enables smallholders to earn a higher income and improve their livelihoods, without jeopardizing food security. Rice is the staple food for the largest number of people on Earth, and the inundated fields make paddy rice the largest single land-use food crop [9]. Paddy rice is grown by 150 million smallholders, mostly in Asia, who are increasingly vulnerable to the impacts of climate change [10]. Paddy rice cultivation is environmentally relevant: it consumes 34-43% of global irrigation water, is the cereal crop with the highest emission of greenhouse gases (particularly methane) and accounts for 13% of global nitrogen fertilizer use [9][10][11]. Less than 10% of the rice produced is placed on international markets, mostly high ('export')-quality rice, including aromatic varieties like basmati [9]. These aromatic varieties have yields that are typically lower than hybrid or open-pollinated local rice varieties (hereafter referred to as 'coarse paddy') but achieve substantially higher market prices. Market demand for organic and fair trade-certified basmati rice has been robust and growing over the past years [12].
Field experiments under optimized conditions have shown that after a conversion period in which soil fertility is built up organic cultivation methods can achieve approximately the same or even higher yields in basmati and rotation crops compared to the conventional system, provided that sufficient quantities of organic manures are applied [13,14]. Previous on-farm studies on conversion to organic rice farming systems in Asia indicated that organic farms achieve approximately the same yields but increased profitability due to lower input costs [15,16]. However, these studies were mainly based on interviews, and only covered farm data from one season. In this paper, we analyze how conversion to organic basmati cultivation and fair trade is a viable option for smallholder rice producers in northern India. We compare cropping patterns, yields and profitability of main crops in a representative sample of approximately 80 organic and 80 conventional farms over a period of five years.

Materials and Methods
The data analyzed in this paper originate from a project initiated by Coop, the second largest retailer in Switzerland. Since 2011, Coop has supported smallholder rice farmers in Uttarakhand State in northern India in converting to organic farming and selling their produce under fair-trade conditions [12]. The project is part of the company's strategy to convert its own rice brand to fair trade and organic. In recent years, Coop's rice processing and trading company Reismuehle Brunnen has continuously increased the share of sustainable rice, and today, it is the largest supplier of organic and fair trade specialty rice in the European market [12]. The Swiss development organization Helvetas was mandated to assist the establishment of an organic basmati rice value chain in collaboration with its sister organization Intercooperation Social Development India, local farmer organizations, processing companies and research institutes. The key partner in India is the company Nature Bio-Foods Ltd. (NBF) based in Sonepat, which buys the basmati paddy directly from the farmers, mills it in their own processing facilities, and exports it to Reismuehle Brunnen and other clients. It also sells some rice and rotation crops in the emerging domestic organic market under its "Ecolife" brand.
The project is located in Nainital District of Uttarakhand State in the foothills of the Indian Himalayan range. It spreads over approx. 140 villages and hamlets in three Blocks (Ramnagar, Kotabagh and Betalghat), located 300-800 m above sea level. The region receives, on average, 1650 mm rainfall, mainly during the monsoon season (June-September). Rainfall and irrigation from mainly seasonal water sources allow for two cropping cycles: Kharif (June-November) and Rabi (November-March). During the study period (2012)(2013)(2014)(2015)(2016), rainfall in the Kharif season was 970 mm, on average [14].
In 2011, before the project started, trained surveyors collected agronomic and household baseline data in the project region. The number of farms participating in the project grew from 145 in 2011 to 2212 in 2016, and the total area under organic farming from 115 ha to 2730 ha over the same period. For the comparison of organic and conventional farming, field data were collected over five years (June 2012 to April 2017) from a representative sample of organic and conventional farms in the project area for main crops both in Kharif and Rabi seasons. To compare organic farming with the prevailing practice in the same region, we randomly selected 11 of the 81 village clusters where the organic basmati project was active. In the selected village clusters, we randomly selected a total of approximately 80 organic and 80 conventional farms that cultivated basmati and/or coarse paddy (clustered sample). Sample size varied slightly from year to year, due to changes in farmer availability and resulting from a rigorous quality check of survey data (Table 1). Farmers who, over the years, dropped out of the sample (conventional farmers who converted to organic farming, farmers who stopped basmati or paddy farming altogether) were replaced by randomly selected farmers in order to maintain the sample size. Due to delays in rains or provision of seeds, not all organic farmers were eventually able to grow basmati in every year. From 2013 onwards, following the example of organic farmers, some conventional farmers also grew basmati, for which they applied organic inputs only. During each cropping cycle, trained surveyors visited the selected farms in regular intervals to monitor and verify land use, input and harvest data kept or recalled by the farmers. To get accurate per-hectare data, for all major crops, the area of one plot per farm was measured, and all inputs and harvests were recorded for that specific plot. Gross margins were calculated as yields into prices minus direct costs for inputs and hired labor. The cost of family own labor was not taken into consideration, since it would have been very difficult to get reliable data. Processed data were shared with the participating farmers both in individual and aggregated form at the end of the study period.
In 2013 and 2014, data were also collected for additional Kharif crops in order to better understand the relative profitability of basmati cultivation. In 2014 and 2016, household income data were collected from the sample in order to get a better understanding on the relevance of crop revenues for overall household income. The information obtained from these data is used as reference in the discussion chapter. Additionally, two masters students at Wageningen University conducted semi-structured interviews in April and May 2017 with 51 organic farmers, 28 conventional farmers, representatives of the producer organization, local governments, traders, processors and facilitating NGOs. The interviews were based on questionnaires that included three different types of questions: Likert scale [17], open-end and closed-end questions [18]. Results from these interviews are used as background information in the discussion chapter. We compared key indicators between production systems using analysis of variance (ANOVA) in STATA14. ANOVA uses ordinary least squares regression to assess whether means are statistically significant between groups. For pooled data we corrected for location effects (village clusters) and year effects. To compare monetary results over the years, prices, costs and returns were corrected by consumer price index (CPI of 31 December 2012 = 100, Government of India data).

Characteristics of the Organic and Conventional Farming Systems
Smallholder farmers interested in converting to organic basmati farming joined the organic farmer organization Fair Farming Foundation -Ramnagar and signed a production contract with the processing company Nature Bio-Foods Ltd. in which they committed to adhere to organic standards (Indian National Program for Organic Production, EU Council Regulation (EC) No. 834/2007 and BIO SUISSE Standards) on their entire farm. The company provided them with organic seeds of traditional basmati (varieties Dehraduni Type 3 and Taraori HBC 19) and commercial bio-inputs (neem oil, pseudomonas, trichoderma, micro-nutrients) at cost-prices.
Nature Bio-Foods Ltd. managed an internal control system to ensure organic integrity and arranged and paid for third-party certification as per the specified organic standards and Fairtrade International standards. It purchased the certified basmati paddy, as well as some pulses directly from the farmers, following an agreed pricing mechanism (guaranteed fair-trade minimum price or market rates, whichever was higher, plus defined organic premiums of approx. 10-15%, and rebates for sub-standard quality).
Organic farmers participating in the project received initial training on organic farming practices and were assisted in testing different organic methods in their fields (participatory technology development). Farmers were also trained in improved paddy cultivation techniques based on the System of Rice Intensification (SRI), combining earlier and wider transplanting of seedlings, alternate wetting and drying, and mechanical weeding using hand-pushed "conoweeders" [19]. While a majority of farmers adopted the alternate wetting and drying regime in irrigation, the complete SRI system was only adopted by 19% of the farms in 2016. Farmers sold their organic basmati to Nature Bio-Foods Ltd., but sold most of their rotation crops on the general market, without getting a price premium for the organic quality. Conventional farmers in the region received some training and advice on best farming practices from the District's agricultural department. They sold their paddy and rotation crops to local traders or to local agricultural markets ('mandis').
Average holding of arable land was 33% higher in organic farms (0.72 ha) compared to conventional farms (0.54 ha). The number of cattle per farm and therefore the access to manure did not differ between the two groups. In both organic and conventional farms, the main crops grown in the Kharif season were paddy, soybean and amaranth, while in the Rabi season, wheat was the dominant crop, with some farmers also growing pulses, vegetables and spices ( Figure 1). Organic farms had higher shares of arable land under basmati and pulses in Kharif season. In the first three years, the share of basmati in organic farms increased from 9% to 21%, but then declined to 14% and 13% in 2015 and 2016 due to unfavorable rain patterns. The reason that some of the conventional farms also grew basmati starting from 2013 onwards is that they wanted to try out the proposed innovation. Some of them converted to organic farming in subsequent years. In Rabi season, cropping patterns did not significantly differ between organic and conventional farms, with wheat being the predominant crop. Only in the last year (Rabi 2016-2017), when the buyer started promoting organic lentil and chick pea production, organic farms had a higher share of pulses (13%) compared to conventional farms (10%). The recommendation to increase the share of nitrogen fixing leguminous crops in organic rotations [20] has so far only been implemented to a limited extent.
Crop management practices differed considerably: Conventional farmers used urea, diammonium phosphate (DAP) and compound NPK-fertilizers (on an average 98 kg N ha −1 in coarse paddy and 107 kg N ha −1 in wheat, ranging from 25-350 kg N ha −1 ), along with farmyard manure, as nutrient sources. Synthetic fertilizer input in conventional paddy substantially decreased over time, from 179 kg N ha −1 in 2012 to 62 kg N ha −1 in 2016. Conventional farmers also applied various types of commercial insecticides, fungicides and herbicides (on an average 5.6 L ha −1 in coarse paddy and 1.0 L ha −1 in wheat). Organic farmers used farmyard manure, compost and green manure (mostly Sesbania aculeate) grown in situ. They applied bio-inputs provided by the buyer (Pseudomonas, Trichoderma, Neem oil, micro-nutrients derived from biomass) and home-made preparations based on cow urine and other natural ingredients for pest and disease control. Average cattle holding was the same in organic and conventional farms: 3.6 adult animals and 1.4 calves.

Yields
There was no significant difference in five-year average yields of main rotation crops in Kharif (basmati, coarse paddy and soy bean) and Rabi season (wheat, lentils and chick peas) between organic and conventional farms (Table 2). In single years, the only differences were in lentils in 2012 (organic yields were 14% lower than conventional yields) and in 2016 (organic yields were 2% In Rabi season, cropping patterns did not significantly differ between organic and conventional farms, with wheat being the predominant crop. Only in the last year (Rabi 2016-2017), when the buyer started promoting organic lentil and chick pea production, organic farms had a higher share of pulses (13%) compared to conventional farms (10%). The recommendation to increase the share of nitrogen fixing leguminous crops in organic rotations [20] has so far only been implemented to a limited extent.
Crop management practices differed considerably: Conventional farmers used urea, di-ammonium phosphate (DAP) and compound NPK-fertilizers (on an average 98 kg N ha −1 in coarse paddy and 107 kg N ha −1 in wheat, ranging from 25-350 kg N ha −1 ), along with farmyard manure, as nutrient sources. Synthetic fertilizer input in conventional paddy substantially decreased over time, from 179 kg N ha −1 in 2012 to 62 kg N ha −1 in 2016. Conventional farmers also applied various types of commercial insecticides, fungicides and herbicides (on an average 5.6 L ha −1 in coarse paddy and 1.0 L ha −1 in wheat). Organic farmers used farmyard manure, compost and green manure (mostly Sesbania aculeate) grown in situ. They applied bio-inputs provided by the buyer (Pseudomonas, Trichoderma, Neem oil, micro-nutrients derived from biomass) and home-made preparations based on cow urine and other natural ingredients for pest and disease control. Average cattle holding was the same in organic and conventional farms: 3.6 adult animals and 1.4 calves.

Yields
There was no significant difference in five-year average yields of main rotation crops in Kharif (basmati, coarse paddy and soy bean) and Rabi season (wheat, lentils and chick peas) between organic and conventional farms (Table 2). In single years, the only differences were in lentils in 2012 (organic yields were 14% lower than conventional yields) and in 2016 (organic yields were 2% higher). However, sample size was relatively small for lentils. Yield effects of the cropping system were also not significant when controlling for location (village).

Profitability
Organic farms achieved the same or higher gross margins compared to conventional farms (Table 3). Five-year averages of gross margins were not only higher in organic basmati, for which farmers received a premium price, but also in coarse paddy, wheat and lentil. Effects of the cropping system were also significant when controlling for location (villages). Rotation crops were sold in local markets without premium price, except for Rabi 2016, when the buyer purchased lentils and chickpeas with a 7-13% organic premium. Production costs (for seeds, external inputs and hired labor) in organic farms were lower than in conventional farms only in some crops: −23% for coarse paddy (9434 INR ha −1 vs. 12,230 INR ha −1 , F = 15.9), and −25% for wheat (7748 INR ha −1 vs. 10,361 INR ha −1 , F = 37.0; 1 EUR = 71.48 EUR in 2016).

Agronomic Performance of Basmati versus Coarse Paddy
Farmers who joined the project and shifted to organic production switched part of their paddy cultivation to traditional basmati. Therefore, we are comparing the agronomic and economic performance of organic basmati with conventional coarse paddy. Organic basmati production achieved on average 46% lower yields, but 182% higher sales prices (Table 4). These differences are not surprising, since traditional basmati generally has lower yields but higher market prices than coarse paddy, irrespective of the production system [21]. Input costs (for external fertilizer and pest management means) and overall production costs (including costs for seed and hired labor) were 50% and 45% lower in organic basmati, respectively, resulting in 105% higher gross margins than in conventional coarse paddy cultivation.
Gross margins in organic basmati were consistently higher (by 63% to 221%) than conventional paddy in all five years (Figure 2). The particularly strong performance in 2013 was due to a temporary price spike in the overall basmati market (organic farmers received 46.4 INR kg −1 on average, compared to 29.9 INR kg −1 in the other years), while in 2016, unfavorable rainfalls affected coarse paddy yields and profitability.   The price spike of 2013 resulted in a higher variability of gross-margins-as measured by the farm-level coefficients of variation-for organic basmati than for conventional paddy (Table 4). However, this difference is not statistically significant, even at the 10 percent level. Moreover, the difference is caused by an upward singularity, whereas farmers are mainly concerned about downward risk. This indicates that organic basmati cultivation is economically not riskier than conventional coarse paddy cultivation. The price spike of 2013 resulted in a higher variability of gross-margins-as measured by the farm-level coefficients of variation-for organic basmati than for conventional paddy (Table 4). However, this difference is not statistically significant, even at the 10 percent level. Moreover, the difference is caused by an upward singularity, whereas farmers are mainly concerned about downward risk. This indicates that organic basmati cultivation is economically not riskier than conventional coarse paddy cultivation.

Productivity of Rice-Based Organic Systems
The result that yields do not differ between organic and conventional farms is surprising. Organic farmers replaced synthetic fertilizers and pesticides with organic means, which usually results in lower yields [22]. However, farmers in the study area operate under sub-optimal conditions concerning available soil types, irrigation and inputs. Fertilizer input in conventional farms is therefore relatively low in cereal and pulses. Since coarse paddy, wheat and pulses are important staple crops partly produced for household consumption, this finding suggests that conversion to organic farming does not jeopardize food security of smallholders in marginal production regions. Field experiments conducted at GB Pant University for Agriculture and Technology from 2012-2014 in the same region but under optimized conditions have also shown that organic cultivation methods can achieve the same or even higher yields in basmati and rotation crops compared to the conventional system, provided that sufficient quantities of organic manures are applied [14]. The partial shift to basmati for export also did not affect food security of the farm families since they continued cultivating coarse paddy and wheat at least to the extent required for their own consumption.
It is striking to see that fertilizer input in conventional paddy substantially decreased over time. Several conventional farmers reported that they reduced fertilizer input when observing that organic farmers in their village got similar yields with organic manures. However, current manure application rates in organic farms seem insufficient to replace nutrient export through crop harvest, and therefore may lead to soil degradation and reduced productivity in the long term [23]. Improvements in manure collection, storing and application as well as increased use of in situ grown green manure can remedy this situation. Since basmati produces more straw than coarse paddy varieties and therefore increases the availability of fodder, its cultivation may enhance stocking rates and therefore production of manure to some extent [24].
While yields of coarse paddy showed a positive correlation with external input costs both in organic and conventional farms, no such correlation was observed in basmati or other crops. This finding raises doubts regarding the effectiveness of the biocontrol and bio-fertilizer inputs used on these crops.

Conversion to Organic Farming as a Livelihood Strategy
The results of the agronomic performance assessment confirm the finding of Crowder and Reganold [3] that organic farming is more profitable than conventional systems, but contradicts their conclusion that due to 10-18% lower yields, organic crops need a premium of at least 5-7% to be competitive with conventional production. Even without a premium price, organic rotation crops achieved the same profitability as conventional crops. This is in line with other studies in India showing that organic farming reduces the cost of cultivation without affecting net margins, particularly in less intensively cultivated hill regions [25,26]. Other studies comparing organic and conventional paddy systems in Uttarakhand also found that organic farms achieve the same yields but substantially higher net profits due to lower costs of cultivation and the availability of an organic premium [27,28]. Another study comparing (conventional) basmati with coarse paddy in Uttarakhand found that cultivating basmati is more profitable than non-basmati rice varieties [21]. The improved profitability of organic basmati cultivation in our study is therefore a result of both the conversion to organic agriculture and the shift from coarse paddy to basmati.
From a farmer's perspective, the main questions are whether basmati production is sufficiently lucrative as a cash crop compared to other options, and whether the conversion to organic management altogether makes their farms more profitable. Of the three main crops grown in the Kharif season (coarse paddy, basmati and soy bean), organic basmati had the highest gross margin in all years. Additional data collected in 2013 and 2014 show that only vegetables like tomato and spices like ginger and turmeric achieve higher gross margins, but also involve considerable investments and risks (crop failure, market fluctuations). These findings suggest that organic basmati is an interesting cash crop for farmers, combining good profit margins with relatively low risk. It is, therefore, not surprising that shares of land allocated to basmati cultivation were positively correlated with basmati gross margins in the previous year (p < 0.001).
However, organic farms allocated only an average of 15% of their arable land to basmati cultivation, and no clear upwards trend was observed over the five years. 22-33% of the organic farmers who registered with the project did not even grow any basmati. Interviews with farmers point out various reasons why they do not increase the basmati share. Delayed rains often force them to grow coarse paddy that has 25-30 day shorter crop cycles compared to traditional basmati varieties, or switch to soybean or millet if rains are further delayed. Farmers also assess what crop-to-field combination they expect will be best. Such decisions may be based on crop preferences, for example prioritizing the production of food crops for home consumption over cash crops. Also, labor and risk aversion play a role. Farmers typically grow cash crops on fields close to the compound, making it easily accessible for crop management, including protecting the field from being invaded by wild boar, monkeys and other wildlife [29]. Due to land fragmentation, available acreage close to the compound is limited in size, limiting the expansion of basmati cultivation.

Available Strategies to Further Improve Household Income
Surveys conducted among organic and conventional farms in the project region in 2011, 2014 and 2016 indicate that total annual household income (including income from agriculture, employment, labor and small-scale businesses) has been relatively stable over time (on average approximately USD 1000 per household of 4-5 persons, ranging from USD 200 to 4500). However, the share of agricultural income has declined from 60% in 2011 (baseline) to 43% in 2016. One reason for this is that all main crops except lentils have shown declining profitability over the years when adjusted by consumer price index. Another reason is that off-farm incomes strongly increased. In 2016, the share of agricultural income was higher in organic farms (49%) compared to conventional farms (35%).
In that year, conventional farms had 3.5 times higher income from employment, leading to 2.5 times higher total income compared to organic farms. Since this result is mainly due to 10 conventional farm households who obtained more than USD 3000 annual income from employment, it may not be representative, though. The higher share of income from agriculture in organic farms along with the larger average farm size could be an indication that households that primarily rely on agriculture are more likely to convert to organic farming.
Even if organic farmers achieve considerably higher gross margins in basmati, this alone does not enable them to substantially increase their household income, since land holdings and the share of organic cash crops are too small. Only if additional rotation crops can be marketed with an organic premium, particularly vegetable and spice crops that generate higher margins, organic farmers will be significantly better off compared to conventional farmers. A crop diversification strategy would also enable farmers to maintain the cash flow throughout the season [24]. The project partners are therefore taking efforts to establish organic value chains for these crops linking organic farmers in the project region to the increasing demand for organic products in nearby cities, including the Delhi metropolitan market. Another viable strategy to make a living from farming may be to manage larger areas of land (e.g., by buying or renting land from households that give up farming) and increase the use of agricultural machinery and tools. Increased mechanization of field preparation, sowing and weed management would enable farmers to reduce labor input. It also enables them to optimize manure application and increase the utilization of green manure [23]. If farmers shifted from transplanting to direct sowing of paddy, this could reduce work load, but at the expense of somewhat lower yields [30].
While diversification and mechanization strategies have obvious advantages, they also have disadvantages. They both require specific skills, infrastructure and market linkages, and therefore may not be available to all households. More research is needed into these aspects before providing valid recommendations in a specific local context.

Environmental Benefits
The environmental benefits of organic compared to conventional agriculture have been widely discussed in the scientific literature [22,[31][32][33][34]. Notable differences between organic and conventional agriculture relate to the strategies for pest and nutrient management. Organic farmers rely on organic pesticides that typically have lower toxicity and often lower persistence in the environment compared to most pesticide formulations used in conventional agriculture [31]. Organic farmers in the project presented here only used botanical extracts (mainly neem, which is of low toxicity) for pest management both in basmati and in the rotation crops, eliminating exposure to synthetic pesticides and consequently the risk of adverse effects on human health and of contamination of water sources. Nutrient management has an important effect on various sources of nitrogen (N) pollution: Nitrate leaching can contaminate ground and surface water; volatilization of ammonia leads to air pollution (PM 2.5 ) and eutrophication of natural ecosystems; and emissions of the potent greenhouse gas and ozone depleting nitrous oxide (N 2 O) adversely affect climate change and human health [35]. Averaged across geographic locations and cropping systems, N pollution on a per unit area basis is lower in organic compared to conventional systems [31,34,36,37].
Because organic certification standards prohibit the use of synthetic fertilizers, organic agriculture solely relies on alternative fertilizer sources such as animal manure, compost and green manures (plants that fix N from the atmosphere). The variety of nutrient management strategies observed across organic farms; however, is not always well reflected in field experiments, an issue that was criticized as a design flaw in the evaluation of comparative organic and conventional systems [38]. Indeed, when inspecting individual studies, the type and management of animal manure or green manures plays an important but incompletely understood role with respect to both the magnitude and direction of the N pollution response [39,40]. In this project, various organic nutrient management strategies were promoted through outreach and extension, including the use of farmyard manure, vermi-compost, biogas slurry, and the green manure Sesbania. A parallel field trial indicated that the organic management options reduced N leaching and NH 3 volatilization in many of the treatment by year combinations compared to the conventional control, whereas the effect of the organic management on greenhouse gas emissions was mostly insignificant (unpublished data). Beyond effects observed at the field scale, however, one needs to consider that widespread reduction in the use of synthetic pesticides and fertilizers would reduce greenhouse gas emissions associated with the production of these compounds at the regional or global scale [8,31].
One commonality between all organic nutrient management strategies is that they imply an input of carbon into the soil. This explains the overall increase in soil organic matter content and soil fertility in organic compared to conventional systems across geographic regions and cropping systems [31,32]. Focusing on Northern India or Uttarakhand in particular, studies have found that organic management promoted soil aggregation and increased organic carbon content, biological activity and nutrient availability compared to soils under conventional management [14,27,41]. Within the parallel field trial associated with this project, it was observed that the organic treatments mitigated nutrient mining and soil degradation compared to the conventional control treatment, as a consequence of lower N loss and higher input rates of phosphorus, potassium and sulphur for an equivalent amount of N (unpublished data). One criticism on the feasibility of organic agriculture, especially with respect to smallholder farmers, is the availability of sufficient organic fertilizer sources to meet crop demands [8,42]. To address this concern, a study was conducted in the project area to evaluate the farm-level impacts of subsystem nutrient management actions and to identify locally viable interventions for increased nutrient supply and recycling [23]. Viable interventions including the reduction of nutrient losses through simple and relatively cheap manure management modifications (i.e., using straw bedding to capture livestock urine, covering farmyard manure stockpiles with plastic sheeting, enclosed biogas slurry storage, and using biogas slurry for improved compost production), in situ green manuring, and purchasing farmyard manure identified through this study are now being promoted by extension services.
Organic soil fertility management contributes to increased water infiltration and retention in soils due to elevated soil organic matter content [14,43], thereby contributing to saving irrigation water. In addition, a majority of organic basmati farmers adopted the alternate wetting and drying (AWD) method in irrigating their basmati plots. Field trials conducted in the project in 2017 indicate that this practice leads to 24% lower water input compared to the earlier practice of keeping water stagnant in the field for longer periods, without affecting yields. This is in line with other studies that report 10-78% lower water input due to adoption of AWD and SRI [19,32,44]. The results of research station field trials conducted in the region in 2012-2014 even found 78-84% lower water inputs and 5.3-6.7 times higher water use efficiency in AWD plots [14].
Using available water resources more efficiently in a water-scarce environment can help improve crop productivity and livelihoods while reducing environmental stress. Equally important to applying water saving techniques at the field level is to improve water management and stewardship at the cluster or village level. Facilitated by the project, farmers formed Water User Groups (WUG) that identified and implemented measures to improve irrigation and drinking water infrastructure. Beneficiary contributions and combined funding from the fair trade premium, municipality budgets and project contributions enabled the WUGs to finance these measures [24].

Conclusions
The study has shown that conversion to organic basmati farming can provide a viable alternative for smallholders in India. Participation in certified basmati value chains that ensure organic and fair-trade prices enables farmers to substantially improve the profitability of paddy cultivation. Due to 45% lower production costs and higher sales prices, organic basmati cultivation was 105% more profitable than cultivating ordinary rice under conventional management. Contrary to the widespread belief that yields in organic farming are inevitably lower, our study shows that organic smallholder farmers can achieve the same yields in cereals and pulses as conventional farmers, with considerably lower external inputs. Even in the absence of organic and fair-trade premiums, organic management can therefore achieve the same or higher gross margins in cereals and pulses as prevailing conventional farming systems. At the same time, good organic management practices contribute to safeguarding environmental resources. If conversion to organic farming involves switching to a particular crop or variety, its comparative profitability and suitability to the local agro-climatic conditions need to be ensured. However, since land holdings are often too small to make a living from cereal and pulse crops, conversion to organic farming will only result in substantially higher household incomes if it goes along with producing higher-value cash crops like vegetables, fruits and spices for domestic markets. We therefore propose that future efforts to enhance the long-term viability of rice-based organic farming systems in this region focus on diversification involving higher value crops.


extfieldsofstudy: Medicine Economics

text:
Agriculture, Aid, and Economic Growth in Africa

How can foreign aid to agriculture support economic growth in Africa? This paper constructs a geographically indexed applied general equilibrium model that considers pathways through which aid might affect growth and structural transformation of labor markets in the context of soil nutrient variation, minimum subsistence consumption requirements, domestic transport costs, labor mobility, and constraints to self-financing of agricultural inputs.Using plausible parameters, the model is presented for Uganda as an illustrative case.We present three stylized scenarios to demonstrate the potential economy-wide impacts of both soil nutrient loss and replenishment, and how foreign aid can be targeted to support agricultural inputs that boost rural productivity and shift labor to boost real wages. One simulation shows how a temporary program of targeted official development assistance (ODA) for agriculture could generate, contrary to traditional Dutch disease concerns, an expansion in the primary tradable sector and positive permanent productivity and welfare effects, leading to a steady decline in the need for complementary ODA for budget support.

Supplementary Online Appendix S3: Model Parameters
This paper focuses on the presentation of a general economic model rather than precise point estimates. Future research could usefully identify more refined subnational parameter values for Uganda. The parameters used for this model are presented below, and are set to a general baseline of the year 2002. Factor shares in production functions are assumed at standard values (e.g., see Eberhardt 2006). The cost of capital, depreciation rates, the FDI multiplier, share of services in consumption, and public sector service wage premiums are assumed. Capital stocks and productivity terms were estimated using the Uganda social accounting matrix for 2002 (Alarcon et al. 2006), and then scaled. Public sector import contents were set at one for simplicity. The labor force is set to match the approximate reality of 19.6 million workers as of 2002, and the population of origin from each region matches the approximate real distribution of populations. The distribution of roads and agricultural capital stocks across the four regions provides another approximate match of the reality in Uganda. The northern region is poorest, and therefore starts the first period with slightly higher transport losses, lower cash crop capital stock, and lower cash crop productivity.

(B) General
impcontc p Import content share in commodities for public sector p impcontc p = 1 impcontk p Import content share in capital for public sector p impcontk p = 1 ltot t Total labor ltot t = 19.6 pimpr t Price of imported goods in rural area pimpr t = 1 pimpu t Price of imported goods in urban area pimpu t = 1 (C) Regional

Supplementary Online Appendix S4: Overview of Uganda as Illustrative African Economy
Uganda faces many core challenges common across low-income African subsistence economies. Some key characteristics are described here. These draw from a range of sources, mainly published during the course of the early 2000s, and thus present a thematic overview rather than a precise snapshot at a single point in time. The data also predate Uganda's recent commencement of oil production. As of 2012, approximately 35 percent of Uganda's population still lived below the international extreme poverty line of $1.90 per day in 2011 purchasing power parity terms (World Bank 2017). The vast majority of the country's poverty is concentrated in rural areas, where most Ugandans are engaged in crop agriculture. Infrastructure is limited. Only approximately 10 percent of households had electricity as of the early 2000s (Okidi et al. 2005). For decades, gross domestic saving rates were extremely low, well below 10 percent of GDP, although they averaged a slightly higher 13.1 percent from 2006 to 2015 (World Bank 2017). A 1997 Bank of Uganda survey found that fewer than a quarter of rural Ugandans had ever saved and that 85 percent of the other three-quarters cited low income as the primary factor for not doing so (Musinguzi and Smith 2000).

Staple Food Agriculture
Uganda's staple agriculture sector has experienced general long-term stagnation. Figure S4.1 presents trend data for cereal production per capita from 1961 to 2014. From a peak of nearly 180 kilograms per person in 1969, output has been stagnant, at less than 100 kilograms per person, since the early 1980s. Figure S4.2 indicates similar trends for a broader index of food production per capita. Siriri, Bekunda, and Jama (2005) find that yields are typically one-quarter to one-tenth of current potential. This is significantly driven by the low usage of modern farm inputs. Fewer than a third of agricultural households use improved seeds, and only 8 percent use inorganic fertilizer (Okoboi and Barungi 2012). Yet despite the stagnation, Uganda has not become a marked food importer. Historically the coun- try has engaged in almost no staple crop trade; for many years nearly all its imported food was wheat and maize aid for conflict-affected areas in the north.

Soil Nutrients
Like much of Africa, Uganda faces a major soil nutrient challenge. For many years, agricultural output was maintained through land clearing, but population pressures (see Figure S4.3) and a lack of fallowing mean that farmers are now mining nutrients at faster rates and decreasing long-term yields in the process. Data compiled by Ssali (2002) and Ruecker (2005) indicate that a large portion of Uganda's soil is now below the so-called critical 3 percent value for soil organic matter. Henao and Baanante (2006) estimate loss rates for nitrogen, phosphorous, and potassium to be among the highest in Africa, at more than 60 kilograms per hectare per year. The consequences are significant. Nkonya, Kaizzi, and Pender (2005) estimate a cost of approximately $153 per household per year to replenish mined soil nutrients at market prices, equivalent to nearly a fifth of GDP at the time of calculation.
Fallow periods have fallen from 10 to 15 years a century ago down to two and even zero years today (Nandwa and Bekunda 1998). In large parts of the country, fewer than 10 percent of farms have been estimated even to use fallows (Pender et al. 2001). Fertilizer is necessary, even if not sufficient, to stop and reverse the patterns of nutrient decline and address the soil nutrient challenge. However, cost is a barrier because staple crop farmers often face poor relative returns on fertilizer, often with a "value to cost ratio" of 1 or less (e.g., Wortmann and Kaizzi 1998;de Jager, Onduru, and Walaga 2003;Kaizzi 2002;Matsumoto and Yamano 2009).
Uganda's internal geographic heterogeneity underscores the disparate range of farming systems across Africa. Ruecker et al. (2003) identified seven categories of agricultural potential across the country based on permutations of four climate variables. First, annual precipitation cycles affect the extent of water availability throughout the year. The northeastern section of the country has unimodal rainfall, while the southern and central areas, which are closer to the equator, have bimodal rainfall. Second, the length of growing period is measured as the period over which mean monthly rainfall exceeds half the mean potential evapotranspiration. This ranges from less than five months in the northeastern districts to 10 or more months in the central region and in the southwestern highlands. Third, the actual level of annual precipitation varies tremendously throughout the country and changes at a steep gradient, particularly in the "crescent" around Lake Victoria. Fourth, extreme temperatures constrain agricultural productivity. The range of growing conditions results in significant variations in the concentration of staple crop by region.

Other Key Sectors
Cash crops, especially coffee, have historically been a major driver of Uganda's growth and poverty reduction. However, fewer than 10 percent of the country's farm households grow coffee, and the commodity's share of exports has declined significantly (Kappel, Lay, and Steiner 2005;Bussolo et al. 2006). As of the mid-2000s, cotton, tea, and tobacco had increased in volume and total value exported, while flower exports had also been introduced. Fisheries have overtaken coffee in overall export value, but only a small share of the population is engaged in that activity. In any case, all the export shares need to be considered in the context of Uganda's low overall export/GDP ratio, which ranged between 15 and 24 percent from 2006 to 2015 (World Bank 2017).
Manufacturing remains a small element of the economy, historically accounting for less than 10 percent of GDP, as indicated in table S4.1. Table S4.2 shows that the sector still employed less than 4 percent of the labor force as of 2002. The service sectors-including wholesale and retail trade, transport, communications, and construction-employed approximately 9 percent of the labor force, split fairly evenly between urban and rural areas, accounting for approximately one-third of GDP. Government accounted for the largest share of GDP, at approximately 20 percent, and 7 percent of the labor force. Most of the public labor force is situated in rural areas where the population lives, but approximately one-third is based in urban areas, especially the public administration hub of Kampala.

Transport Costs and Infrastructure
A key attribute of Uganda's economy is its limited infrastructure and high transport costs, which are among the highest in the world (Buys 2006). In multiple sectors, including food, these costs provide both implicit protection for domestic producers and implicit tax on exports (Milner, Morrissey, and Rudaheranwa 2000;Rudaheranwa 2006 (2004) and Alarcon et al. (2006).


extfieldsofstudy:
Computer Science
Economics

text:
The Strategic Role of Dividends and Debt in Markets with Imperfect Competition

In a seminal paper Brander and Lewis (Am Econ Rev 76:956–970, 1986) show that oligopolistic firms with limited liability follow a more aggressive output strategy as their leverage increases. In a follow-up paper Glazer (J Econ Theory 62:428–443, 1994) points out that when debt is long term and rival firms choose their equilibrium quantities in two consecutive periods, they have an incentive to be more collusive in the first period than static oligopolists would be. In this paper we argue that the incentive to collude is driven by limited liability and the dividend policy of the firm. We find that increasing leverage causes firms in both periods to increase their output and hence to be more aggressive. Additionally, we find that it is always optimal to pay out profits immediately. Moreover, we show that the symmetric game admits multiple equilibria some of which cause firms to choose asymmetric product market strategies.

strategies. 1 Brander and Lewis adopt the view that managers generally have incentives to maximize the equity value of the firm. In this setting leverage changes the payoffs to equity and therefore affects the product market strategy. In particular, Brander and Lewis show that if product markets are characterized by oligopolistic competition, more leverage causes the firms to be more aggressive (i.e., produce more) in the output market. Oligopolists will tend to have more debt than monopolists or firms in competitive industries. Maksimovic [14] further extends the model by analyzing the effect of a firm's capital structure on its product market strategy in the context of a model of repeated oligopoly. He shows that high levels of debt deters equity holders to deviate from collusive behavior in the product market.
The intuition of Brander and Lewis is straightforward and is a consequence of limited liability and the manager's incentive to maximize equity value. To see how debt influences product market strategies in this framework let us consider their model in more detail. Assume that there are two Cournot oligopolists that face uncertain demand, where demand, and hence marginal revenue, increases in good states. Firms play a two-stage game in which debt levels are determined in the first period and equilibrium outputs are chosen in the second. Optimal product market behavior requires that if marginal revenue is high, firms will set high levels of quantity. Since firms set their quantities before demand realizations are known, as a consequence of limited liability they ignore those states where demand is low and hence they have an incentive to be more aggressive in the output market. Consequently, increasing debt causes the firms to be even more aggressive and further increase output, i.e., pursue riskier product strategies. 2 In a Cournot market this mechanism causes firms to commit to higher output levels since the optimal response of the rival is then to produce less, thereby making the opponent better off. Hence, in this model debt serves as a commitment device for more aggressive output market strategies.
After showing how output depends on debt they investigate whether there is an optimal level of debt. For the case that marginal revenue increases with the level of good states of the world they get the result that debt levels will be strictly positive.
Showalter [19] raises the question whether the results of Brander and Lewis depend on the assumption of Cournot competition. He shows in a critical note that the optimal strategic debt choice of Bertrand competitors depends on the type of uncertainty that exists in the output market. He proves that for cost uncertainty prices have to fall when debt rises. If demand is uncertain increasing debt will increase prices. Hence, cost uncertainty will make competitors more aggressive with increasing debt level, whereas demand uncertainty will weaken the competition with increasing debt levels. Moreover, he derives that under cost uncertainty firms will hold no debt in equilibrium. If demand is uncertain, firms will choose a positive debt level in equilibrium. 3 Pichler et al. [18] identify two effects of leverage on prices. Owners of a firm have incentives to increase the firm's market share in order to engage in risk shifting where the timing of this risk shifting is determined by the firm's debt maturity structure. They call this effect "dynamic limited liability" effect. On the other hand, the presence of default risk causes firms 1 Harris and Raviv [13] survey capital structure theories until the beginning of the 1990s based on agency costs, asymmetric information, product/input market interactions, and corporate control considerations (but excluding tax-based theories). A later review on the relationship between financing decisions and product market behavior is Maksimovic [15]. Parsons and Titman [16] review empirical studies that examine how a firms financing choice affects its strategic decisions and relationships with its nonfinancial stakeholders. 2 Dimitrov [7] provides a summary of theoretical arguments through which financial leverage can affect the operating risk of a firm and discusses empirical evidence. 3 Other papers that analyze price competition in a framework similar to Brander and Lewis are [1,6,20]. Chevalier [5] empirically studies the effect that debt has on the pricing policy of a firm.
to underinvest in positive net present value projects because its owners discount at a higher rate than if there is no default risk. Therefore, higher default probability leads owners to invest less in market share and to set higher prices. Thus, a firm's pricing policy depends on its financial structure both through the probability with which the firm defaults and through the way in which the default probability varies over time. These effects are nonlinear and their interaction is positive for some firm-years and negative for others. Using a sample of hotels in Austrian ski resorts which are exposed to demand uncertainty due to uncertainty about snow conditions, they provide empirical evidence for these two effects.
Fulghieri and Nagarajan [10] show that debt holders and equity holders in the Brander and Lewis framework would be better off if the firms repurchased their debt just prior to the quantity decision. Their result hinges on the assumption that each firm's output decision has to be made before the amount of the competitors's debt, which is repurchased by the competitor, is observed. Therefore, they show that firms will hold no debt whatsoever if they have the opportunity to disguise their leverage. Furthermore, they show that under asymmetric information there exist lasting debt contracts which preserve the commitment value and in which not all debt is renegotiated away.
Faure-Grimaud [8] changes the framework of Brander and Lewis by assuming that the lenders cannot verify the demand realization. Under this assumption he derives the result that lenders offer an optimal renegotiation-proof financial contract which resembles a standard debt contract. Contrary to Fulghieri and Nagarajan [10] he assumes that the borrowed amount is common knowledge. As the lender does not observe the true state of nature, there has to be an incentive scheme to make the borrower report truthfully. This is done via rewards that depend on the reported state similar to Bolton and Scharfstein [2]. Not getting this reward can be interpreted as bankruptcy costs. Faure-Grimaud derives the result that the equilibrium output for indebted firms is lower than the equilibrium output level without debt. The intuition is that higher output certainly increases the payoff to equity holders in the states where they are residual claimants but is more than offset by a higher reimbursement, which is necessary to keep the debt contract incentive compatible, and a lower probability to be rewarded. The debt contract in Faure-Grimaud's paper basically forces the manager to maximize debt and equity value simultaneously instead of equity value alone.
Campello [4] proposes that debt can boost and hurt performance of a firm. If there are information asymmetries between the parties of a financial contract, firms with greater access to external financing can threaten their rivals with debt financed product market overinvestment. Thus, debt can initially provide for a product market advantage for those firms. If, however, parties can renegotiate contracts, debt issuance cannot support aggressive market strategies beyond a certain threshold. Campello provides a simple model which implies a nonmonotonic association between firm debt and product market outcomes, building on similar sets of assumptions as Faure-Grimaud [8]. He empirically examines the relation between firm relative to rival debt and sales performance using data from a panel of 115 well-defined product markets over three decades. His findings suggest that moderate debt levels may, on the margin, yield market share gains. Beyond a threshold, however, additional indebtedness leads to significant sales underperformance.
While the theory initiated by Brander and Lewis emphasizes the linkages between the product and financial markets, Glazer [11] challenges their prediction that debt always results in more aggressive output market behavior. In particular, he considers the case in which firms face a two-period Cournot game where they choose output in each period, while debt is long term and is fully repaid only at the end of the second period when the demand uncertainty is resolved. In this setting of long-term debt, firms are not allowed to pay out dividends at the end of the first period. Under these assumptions Glazer [11] shows that the higher the firms' profits in the first period, the less aggressive their product market behavior in the subsequent period. This observation leads Glazer to the conclusion that by issuing long-term debt (debt that cannot be repaid at the end of the first period) rival firms may induce collusive behavior. 4 Glazer's result is confirmed by an empirical study of Phillips [17] for three industries (the fiberglass, tractor trailer, and polyethylene). He finds evidence that market share changes following increases in financial leverage. Firms that increase their financial leverage either lose market share or fail to gain market share when smaller rivals exit the industry. In these industries, rival firms have high financial leverage, and entry is relatively difficult. In the gypsum industry, however, firm-level data show that the largest firms increased their market share at the expense of small firms and operating margins decrease which is consistent with the model of Brander and Lewis [3] and Maksimovic [14]. Phillips emphasizes that the gypsum industry is different in several ways from the other three industries. Several major competitors did not increase their leverage, and barriers to entry are low because the production technology is simple with small plant sizes relative to the size of the market.
Smith et al. [21] test hypotheses which are opposite to the theory of Glazer [11] for publicly listed firms of New Zealand in the period from 1984 to 2008. Before that period reforms in the New Zealand economy occurred which generated a more competitive environment. They find that when publicly listed New Zealand companies use leverage, there is an increase in relative-to-industry sales growth, but a decrease in relative-to-industry return on assets. They interpret these findings as evidence that New Zealand firms use more long-term debt to compete aggressively against their rivals and to increase their market share. On the other hand, they find no evidence that performance has an impact on leverage. Thus, when sales growth has been achieved, New Zealand firms appear to maintain their levels of long-term debt, rather than reduce them. The reason for this may be to ensure their sales growth continues in the future.
Hadlock and Sonti [12] provide evidence that increases in fixed liabilities arising from asbestos litigation (which are debt-like claims in that they are senior to equity in the event of default) lead to more aggressive product market interactions. They argue that a deviation from collusive behavior may result in high current cash flows that could be immediately paid out to equity holders if the fixed claims are not immediately due and there are few contractual restrictions on cash distributions to equity holders. Thus, a firm with an upward shock to its fixed liabilities could rationally prefer to take an aggressive current action, as the future expense of this action is borne primarily by the firms fixed claimants and competitors.
In this paper, we deal with Glazer's analysis and point out that his prediction that longterm debt causes firms to be more collusive in the initial periods of the planning horizon does not hold which is in line with Smith et al. [21] and Hadlock and Sonti [12]. In particular, we prove that issuing debt (even if it is long term) always causes firms to be more aggressive in the product market. Moreover, we find that the difference from the result found by Glazer [11] is a consequence of how frequently profits are paid out as dividends to shareholders. Hence, the results are driven by the fact that there is a dynamic link between the two periods. When profits in the first period are retained, they influence the bankruptcy states in the second period.
To see what kind of economic mechanism causes our results let us refer to Glazer [11]. He looks at the following two scenarios. In the first, firms produce over two periods and issue an amount of debt that exceeds profits generated in the first period. Since managers maximize equity value, higher residual debt from the first period (i.e., that amount of debt that is carried over into the second period) induces firms to be more aggressive in the second period and consequently have lower profits. This corresponds to the Brander and Lewis effect of debt. As a consequence, if firms produce over two periods, they have an incentive to carry over as little residual debt as possible into the second period; hence, they restrict output in the first. The case of long-term debt can be viewed alternatively as one in which profits in the form of dividends are fully paid out only after uncertainty is resolved, i.e., at the end of the second period. This implies that Glazer's model can also be seen as one in which production decisions occur more frequently than dividend payments.
The first scenario with debt financed firms is now compared to the second scenario in which firms are fully equity financed. In this case, however, Glazer assumes that profits are paid out to shareholders in every period, a scenario that is not compatible with the case of long-term debt. If firms, on the contrary, do not fully pay out profits as dividends, they can survive some of the bad states of demand in the next period which would have caused financial distress otherwise. Hence, the number of good states increases, which results in less aggressive behavior than the case where dividends are paid out every period. Limited liability, however, still causes firms to be more aggressive than static Cournot. Therefore, the firms have the same incentive to collude as described above.
To summarize, our paper makes the point that it is the limited liability effect together with the dynamic link of retained profits 5 that drives the result of Glazer and not long-term versus short-term debt. In particular, we prove that in the case where the sequence of dividend payments does not coincide with the sequence of production decisions equilibrium, output decisions in both periods are increasing with the level of debt independent of whether debt is long or short term. Therefore, contrary to Glazer, long-term debt does not cause prices to fluctuate more.
All these results relate to the effects of debt on product market behavior. Additionally we show by means of a numerical example that the dynamic symmetric game admits asymmetric subgame-perfect equilibria. This observation leads us to conclude that firms which face similar demand characteristics and financial structure may very well end up with very different output market strategies.
Our paper is organized as follows. In the next section we present the model which is identical to that of [11]. In Sect. 3 we derive our main results and present some numerical examples, and finally Sect. 4 concludes the paper.

The Model
The specification of our model follows that of Glazer [11]; hence, its description can be brief. We consider a duopoly market in which firms produce a homogeneous product over two periods. The quantity produced by firm i in period 1 is denoted by x i . Industry output in the first period X = x 1 + x 2 is related to the market price, P 1 , by means of an inverse demand function which in its linear form is given by 6 5 In our model retained profits play the role of negative debt. This neglects the fact that when external finance is costly, cash should not be considered as the opposite of debt. Frésard [9] empirically studies how cash holdings affect a firm and its rivals' competitive behavior. He provides evidence that cash policy comprises a substantial product market dimension and that cash and debt policy have distinct implications for product market conducts. 6 The general conclusions of our paper do not depend on the functional form of the demand and cost functions. The linearity assumption substantially reduces the complexity of the problem, however.
where a > 0. Marginal production costs are assumed to be constant, i.e., costs are given by C(x i ) = ax i . Hence, the first period profit function becomes In the second period each firm chooses a quantity denoted by y i under the assumption of uncertain demand. Hence, the inverse demand function becomes where P 2 is the price in period 2 and z is a random variable that is uniformly distributed over the interval [0,1]. Hence, on average, demand in period 2 is equal to that in period 1, but it can deviate from it. The cost structure in period 2 is assumed to be identical to that in period 1.
Profits of firm i in period 2 now depend not only on the quantities produced but also on random demand, represented by z. For a given realization ofz profits are given by With given first and second period quantities expected profits of firm i with unlimited liability become with distribution function F(z) = z. In case of no debt and no limited liability firms determine their optimal quantities on the basis of the present value of the expected profit which in the case of a zero interest rate is given by (3). Introducing debt and limited liability changes the structure of the problem considerably. To see this, let us first look at the case of limited liability. Since demand in period two is stochastic, it is possible that the firm faces financial distress. In particular, since the production decisions are based on ex ante expectations of demand, it is possible that ex post realizations of z are so low that the profits in period 2 are negative. Depending on whether or not profits from period 1 have been paid out as dividends the firm may face bankruptcy. In the case where the accumulated profits over both periods do not cover the payments to the variable factors of production (i.e., wages to workers and expenditures to suppliers for intermediate products or resources) the firm is bankrupt and the owners of the factors of production are in the same position as debt holders. Hence, in the case of limited liability they become the residual claimants. As a consequence the manager of the firm must take into account the case of bankruptcy when making equilibrium production decisions. If he is risk-neutral and maximizes the equity value of the firm over the two periods his objective function in case that there are no dividend payments at the end of period 1 becomes where 1 − F(ẑ i ) is the probability that the firm is not bankrupt andẑ i is that level of demand realization for which profits that are earned in the first period (and which are not paid out as dividends) are sufficient to cover the operating losses from the second period, i.e., Clearly, in this case the frequency of the production decisions does not coincide with that of the dividend payments. While production choices are made in the first and the second periods, dividends are only paid out after demand uncertainties are resolved at the end of the second period.
Things are different if managers pay out dividends with the same frequency as production decisions are made. In that case production decisions in the first period are made in the same way as in the static Cournot model (i.e., based on the profit function 1 i ) and realized profits are distributed to shareholders. We assume that managers follow a dividend policy so that a fraction of first period profits equal to 1 − α i (0 ≤ α i ≤ 1) is paid out as dividends. Quantity decisions in the second period are then made under the assumption that for some levels of z bankruptcy occurs and that these levels do depend on the amount of dividends paid out at the end of period 1. This implies that the two-period objective function of a risk-neutral equity maximizing manager becomes whereẑ i is that level of demand for which profits of the second period together with that fraction of period 1 profits not paid out as dividends (i.e., retained earnings of the first period α i 1 i ) are equal to zero, i.e., We should note that in case of no dividend payments at the end of period 1 (α i = 1) the objective function (6) is identical to (4) and the bankruptcy constraint becomes (5). Introducing dividend payments in the model of Glazer [11] provides us with two different opportunities of modeling dividend policy. We can assume that the firm's dividend policy is exogenously determined and look only on the influence of a predetermined level of dividend payments on the bankruptcy states and hence on the optimal production decisions. Alternatively we can allow managers to choose an equity value maximizing dividend policy and hence derive it endogenously. In this paper we will deal with both cases but start with the first one.
So far we have not introduced debt into our model. If firms issue debt D i , which is partly paid back at the end of the first period, 7 the problem of equity maximizing managers is given by 7 If firms retain the fraction α i 1 i (x i , x j ) of period 1 profits and use it to pay back debt at the end of the period, residual debt that is carried over to the second period is given by where for notational convenience we have introduced corresponds to net retained first period profits. If this expression is negative, we call |R i | residual debt.
In the case where debt is long term (i.e., profits earned in the first period are not sufficient to repay debt entirely) and α i = 1 problem (7) coincides from a shareholder point of view with the case where there are no dividend payments at the end of the first period. Therefore, when one wants to study the impact of long run debt on the product market strategy of a firm one must compare the outcome of model (7) with α i = 1 to that of (4). This is not done in the paper by Glazer [11]. When he studies the impact of long run debt on the product market strategy he compares problem (7) with α i = 1 to problem (6) with α i = 0 (i.e., problem (4)). This implies that we have two different dividend policies at work. In the case of debt, managers pay out no dividends at the end of the first period, while in the case of no debt all first period profits are paid out as dividends. We will show that this difference is crucial for the impact of debt on the product market strategy.

Dividend Payments and the Impact of Debt on the Product Market Strategy of a Firm
Our aim in this section is to analyze the relationship between dividend payments, debt and product market behavior of oligopolistic firms. In particular, we point out that it is the way that dividends are paid out to shareholders that induces firms to more or less collusive behavior than static Cournot competitors. If firms pay out dividends in the first period, they influence the bankruptcy states and hence the product market strategy in the second period. In a twoperiod model the subgame-perfect equilibrium in the second period is characterized by a product market behavior that is more aggressive the lower the profits retained from the first period are. Since both the dividend and the debt policy of the firm influence the profits carried over to the second period, it is clear that the dividend and debt policy influence the product market strategy. Since more aggressive behavior causes both firms ex post to be worse off, they have an incentive to earn as much profits as possible in the first period. This implies collusive behavior. We will show that this incentive is a consequence of limited liability and equity value maximizing managers and is not necessarily dependent on the debt policy of the firm. It very much depends on the level of net retained earnings (residual debt) carried over into the second period. But we note that net retained earnings (residual debt) depend on the debt and the dividend policy. Hence, one or the other or both effects can cause the result. We will prove, however, that debt can have an influence on the output strategies in both periods. As in Brander and Lewis [3] debt will cause firms to produce more in both periods than they would otherwise do in a static Cournot model. As a first step we review the impact of net retained earnings carried over into the second period on the output market strategy of a firm (see Brander and Lewis [3] and Glazer [11]).
We assume that net retained profits are less than the profits of a Stackelberg leader in the static first period Cournot game and restrict the initial debt levels D 1 and D 2 to 1/16. 8 Proposition 0 (a) For given first period quantities (x i , x j ) and corresponding profits 1 i in the first period, second period quantities, y e i , that correspond to a subgame-perfect equilibrium will be lower the higher the firm's net retained earnings, i.e., Quantities are increasing in the rival firm's net retained earnings in the first period, i.e., The expected second period equilibrium equity value of firm i, V 2,e i , will be higher the higher the own and the rival firm's net retained earnings, 0 < The more aggressive output strategy of the firms in the second period reflects the fact that managers maximize the equity value of the firm and concentrate only on the good states of demand. Since lower net retained profits carried over to the second period causesẑ i to increase, managers ignore a larger set of demand realizations and base their output decision only on higher values of z. Since marginal revenue in the second period is increasing in z, this causes them to be more aggressive than in a static Cournot market. In the case that the level of issued debt increases this even causes an increase in total expected equity value. 9 After we have identified the impact of dividend payments (and debt) on the output market strategy in the second period we are interested in its effect on the first period quantities. In particular, we address the question if dividend policy cause the firms to be more collusive in the first period.

Lemma 1
First period quantities are characterized by the following.

Let B i (x j ) be the best response of player i to a given quantity x j of player j when
both play a static Cournot game in the first period and let x e i (α, α) = x e j (α, α) be the symmetric output in period 1. Then x e i (α, α) < B i x e j (α, α) for α = 0. 2.
Hence, firm i produces less than Cournot output. 3. For α j = 0 we obtain the Cournot solution for player i.
Proof See "Appendix." Lemma 1 is an interesting result. It states that if firms can credibly announce a dividend policy, they have an incentive for collusive behavior. The economic intuition of this result is identical to that of Glazer [11]. But what is important here is that we identified net retained profits as the driving force behind collusive behavior.
As an immediate consequence of Proposition 0 and Lemma 1 we can compare equilibrium quantities with full and without dividend payments. We denote first and second period 8 These are rather weak and sensible assumptions. The Stackelberg profit would be the highest attainable profit in the first period, and a debt level of 1/16 corresponds to twice the Stackelberg profit. Higher debt levels would never be repaid. 9 It should be noted that Glazer [11] states that dV e i dD i can be either positive or negative. Since we study a more specified model we are able to show that the equity value of the firm always increases with the level of debt. equilibrium quantities in the case when all profits from the first period are distributed as dividends (α i = 0) by x div i , and y div i , respectively. When all profits are retained (α i = 1) we denote the corresponding quantities as x nodiv i and y nodiv i , respectively. Corollary 1 First period quantities in case when all first period profits are distributed to shareholders (α i = 0) are higher than quantities when profits are retained, i.e., x div i > x nodiv i . Second period quantities in the case of dividend payments (α i = 0) are higher than in the case of retained earnings, i.e., y div The results of Corollary 1 state that in a strategic output market with limited liability dividend policy can critically influence the product market behavior of firms. In particular, dividend payments cause firms to be more aggressive in both periods.
This last result suggests that Glazer's finding on the influence of debt on the product market strategy of a firm critically depends on the assumption that in case of no debt all profits earned in period 1 are distributed to the shareholders. If, on the contrary, we assume that profits of period 1 are retained and compare an equilibrium with no debt to a situation with debt, we get the following result for our stylized model that we establish through numerical analysis.

Proposition 1
In a symmetric equilibrium in which first period profits are retained (α i = 1), issuing debt (either long or short term) causes firms to increase quantities in the first and in the second period, i.e.,  Figure 1 shows the change in quantities corresponding to a symmetric change in the level of debt. This diagram shows that second period quantities are set more aggressively than first period ones. This is in line with the theoretical results of Brander and Lewis [3] and Glazer [11]. The economic interpretation for increasing quantities in the first period is as follows. Given first period outputs, increasing initial debt implies lower retained earnings and thus lower profits. To compensate for this loss each firm has the incentive to increase its first period profit by increasing output. This is possible because equilibrium output is lower than static Cournot output. Since we restrict our analysis to symmetric equilibria the same argument holds for the other firm. Thus, period 1 and 2 quantities are strategic complements. Both firms increase their first period outputs, and therefore, they actually lower retained earnings. As illustrated by Fig. 2 expected equity values are decreasing with an increase in leverage.  It is not the nature of debt (long term versus short term) that causes firms to collude in an oligopolistic product market but the way profits are paid out as dividends. This leads us to the next question that we want to address in this paper. So far, we assumed an exogenous dividend policy of the firm by specifying α i ex ante. Now we are interested in deriving an optimal dividend policy. Here we need to remember that optimality refers to the scenario where managers maximize the equity value of the firm. We assume that the decision about debt issuance is fixed prior to the decisions on first period outputs and dividend policy which are selected simultaneously.

Proposition 2
If risk-neutral managers set the dividend policy α i and α j so as to maximize the equity value of the firm, they would pay out first period profits immediately, i.e., choose This proposition illustrates the effect of limited liability. Since there is a positive probability of bankruptcy in the second period, the firm has an incentive to distribute all profits from the first period immediately. Retaining part of first period profits for possibly distributing them at the end of the second period would reduce the expected equity value. Further, more retained profits induce a more aggressive rival's output policy and hence smaller second period expected profits. 10

The Existence of Multiple Equilibria
After having pointed out the strategic role of dividend payments and debt we want to highlight a second feature of Glazer's model. So far we have primarily looked at the symmetric equilibrium and have ignored the possibility of multiple equilibria. In this section we will present a numerical example that shows the existence of asymmetric equilibria even in the case where the firms have identical fundamentals.
We start out with the case of no debt where all the profits of period 1 are retained (α 1 = α 2 = 1) and calculate the first period equilibrium quantities. They are graphically depicted in   Fig. 4). As debt is increased further, we get something like a bifurcation, so that at, for example D = 0.016 the reaction functions intersect three times, implying the existence of three equilibria as shown in Fig. 5.  One of these is symmetric, and the other two are asymmetric. From the graphs in Fig. 5 we see that the symmetric equilibrium is stable, while the two asymmetric ones are unstable. The existence of three equilibria implies that even in the case where firms have identical cost, demand, and capital structures, their output market behavior can differ substantially. When the level of debt is increased further, the multiplicity disappears and uniqueness is restored (as in Fig. 4).
To get some additional insight into the predictions of the model, we also present two asymmetric cases. In one of these, firm 1 is always equity financed, while firm 2 increases debt, and in the other one the debt level of firm one is kept constant at D = 0.016. In the first case we see that the behavior of the equity financed firm is quite different from the debt financed one (see Figs. 6 and 7), but again equity values of both firms are decreasing with the amount of debt. Figures 8 and 9 present the equilibrium quantities and the equity values for the case in which multiple equilibria exist.

Conclusions
In this paper we analyze the effects of dividend payments on the product market behavior of firms if markets are oligopolistic and firms issue debt. It turns out that it is not the nature of debt that plays a crucial role for the equilibrium outputs in the two periods but the way profits earned in the first period are distributed to the shareholders. In particular, we show that paying out dividends at the end of the first period causes managers in the case of limited liability and equity value maximization to increase output in both periods. To understand this result, remember that firms have an incentive for collusive behavior in the first period if all first period earnings are carried over to the second period, as was shown already by Glazer [11]. If all first period profits are distributed to shareholders, firms will produce Cournot output since first period profits are irrelevant for the output strategy used in the second period. We show that distributing first period profits immediately is the optimal dividend policy. Furthermore, in our simple model it turns out that higher debt levels cause firms to be pursue more aggressive output strategies in both periods when first period profits are retained.
The results presented here critically depend on a number of assumptions. Firstly, we have assumed that firms are engaged in quantity competition rather than price competition. For the latter, see, for example, Dasgupta and Titman [6] and the empirical support found by Chevalier [5] that debt has an effect on the pricing policy of a firm, as well as Pichler et al. [18] who provide empirical evidence of the limited liability effect. It is to be expected that Bertrand competition would change the incentive for the firms to collude in the first period since prices in the second period are higher in cases where marginal revenue increases with the uncertainty (see also Baldauf et al. [1] for the case of price competition in a model with strategic debt). Secondly, managers are assumed to maximize equity value only. It would be interesting to look at the case where they maximize a combination of both equity and debt value or model the issuance of debt explicitly which might allow also to study the effect of debt on welfare.
Another interesting approach would be the extension to a multi-period interaction. 11 As the number of periods increases the probability that the firm defaults at some time tends to one. For such an extension indebtedness has to be modeled in more detail. For example, do firms pay back debt as perpetuity or will they repeatedly issue debt? Do conditions for debt issuance have to be renegotiated? Aspects like this provide avenues for future research.
where we have used the fact that z is uniformly distributed over [0, 1]. Therefore, which is = 0 iff the expression in the bracket is zero. Fromẑ i = − R i y i + y i + y j we get the first-order condition Expected second period profits are given by Differentiating this expression we obtain To prove that the above derivative is > 0, we totally differentiate the first-order condition (A.1) to get (6y i + y j − 1) dy i + y i dy j = −d R i .  Fig. 10 The shaded region {(y 1 , y 2 ) : y 1 (3y 1 + y 2 − 1) = −R 1 , y 2 (3y 2 + y 1 − 1) = −R 2 , − 1 32 ≤ R 1 , R 2 ≤ 1 32 } represents all combinations y 1 , y 2 which fulfill the first-order conditions (A.1). The curve represents (6y 1 + y 2 − 1)(6y 2 + y 1 − 1) − 2y 1 y 2 = 0, in the area above the curve this expression is positive, i.e., for all points in the shaded region the nominator in (A.2) is positive Together with the condition d R j = 0 this yields dy e i d R i = − 6y j + y i − 1 (6y i + y j − 1)(6y j + y i − 1) − y i y j < 0 dy e j d R i = y j (6y i + y j − 1)(6y j + y i − 1) − y i y j > 0.
where the signs follow from the results above. Thus, dV 2,e i d R i = (1 − F(ẑ)) (6y i + y j − 1)(6y j + y i − 1) − 2y i y j (6y i + y j − 1)(6y j + y i − 1) − y i y j . is determined by the nominator. We assume that retained profits of both firms lie in the interval [− 1 32 , 1 32 ]. Figure 10 shows that all second period equilibrium outputs lie in the region where (6y i + y j − 1)(6y j + y i − 1) − 2y i y j > 0.
Proof of Lemma 1 The first-order condition for optimal x i , given α i and α j leads to