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Disentangling the Consequences of Direct Payment Schemes in Agriculture on Fixed Costs, Exit Decisions, and Output

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  • Nancy H. Chau
  • Harry de Gorter

Abstract

This paper goes beyond orthodox considerations of direct payment e®ects on agricultural output, by highlighting the role of subsidies in a®ecting individual producers' ability to cover ¯xed costs, and in distorting the volume of aggregate production and net trade by implicitly discouraging exits. The theoretical model considers both taxpayer and consumer ¯nanced decoupled direct payment schemes and compares them to a coupled production subsidy. In terms of possible producer responses to direct payments, we propose an analytical framework of production decision-making in the presence of a stochastic distribution of ¯xed costs across representative farms. We show that decoupled payments in theory can have a larger e®ect on output than coupled payments. The model explicitly recognizes three consequences of domestic support: (a) induce exit or entry; (b) bias production incentives to domestic markets; and (c) cross-subsidize export in global markets. An empirical model of the U.S. wheat sector is developed to illustrate the relative potential impacts of coupled versus decoupled payments on output through the e®ects on a farmer's ability to cover ¯xed costs and hence exit decisions.

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File URL: http://hdl.handle.net/10.1111/j.1467-8276.2005.00804.x
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Bibliographic Info

Article provided by Agricultural and Applied Economics Association in its journal American Journal of Agricultural Economics.

Volume (Year): 87 (2005)
Issue (Month): 5 ()
Pages: 1174-1181

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Handle: RePEc:oup:ajagec:v:87:y:2005:i:5:p:1174-1181

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  1. Moschini, GianCarlo & Sckokai, Paolo, 1994. "Efficiency of Decoupled Farm Programs Under Distortionary Taxatioin," Staff General Research Papers 12713, Iowa State University, Department of Economics.
  2. Daniel A. Sumner & Christopher A. Wolf, 1996. "Quotas without Supply Control: Effects of Dairy Quota Policy in California," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 354-366.
  3. Kuhn, Betsey A. & Offutt, Susan E., 1999. "Farm Policy in an Era of Farm Diversity," Choices, Agricultural and Applied Economics Association, vol. 14(3).
  4. David A. Hennessy, 1998. "The Production Effects of Agricultural Income Support Policies under Uncertainty," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 46-57.
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