Trade Liberalization, Selection, and Productivity in a Supply Managed Economy

In this paper I use farm-level data from the Quebec dairy industry to estimate the relationship between productivity and participation in the Commercial Export Milk (CEM) program (2000-2003). Under the CEM program farmers could sell milk without production quota and faced a farm price that was approximately half of the domestic price under supply management. I find a positive correlation between participation in the CEM program and farm-level total factor productivity (TFP). I then use a difference-in-difference research design with inverse propensity weights to test for causality in the relationship between participation in the CEM program and TFP. I find evidence of a positive and statistically significant effect in two of four regression specifications. A number of economists have argued that the Canadian dairy industry could benefit from trade liberalization through export market growth and returns to scale in production. My results suggest that trade liberalization would also lead to additional productivity and welfare gains from farm-level selection and the direct effects from exposure to a competitive pricing environment.