Incomplete Markets and Government Agriculture Policy

This paper investigates the welfare effects of several stereotypical agricultural policies in an economy with production risk and incomplete contingent claim markets. The policies analyzed include target price/deficiency payment programs (the Brannan Plan), production controls (the Cochrane Plan), and land set-asides. When there is no trading in contingent claims and when economic parameters take on values characteristic of staple food markets, the paper finds that a joint Brannan Plan—production control program is often welfare increasing. However, production controls on their own tend to be welfare decreasing. In addition, land set-asides are generally welfare reducing, even in the presence of a Brannan plan. These results are derived analytically in a simple equilibrium model. They are illustrated with a numerical example which demonstrates that welfare benefits from typical agricultural policy interventions can be large.