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Experimental Work On Subsidies, Moral Hazard, And Market Power In Agricultural Markets

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  • OWEN R. PHILLIPS
  • AMY M. NAGLER
  • DALE J. MENKHAUS
  • CHRISTOPHER T. BASTIAN

Abstract

Laboratory markets are created to capture the important features of agricultural commodity markets. Sellers make production decisions and hold inventories before goods are sold. In a posted‐bid auction environment, price supports create a moral hazard for sellers. Part of the price‐support subsidy is transferred to buyers in the form of lower prices, which are close to those predicted by the buyers' Cournot level. The subsidy program is expensive for this reason. Lump‐sum payments correct the moral hazard problem and are better at transferring income to sellers. However, transfers made at the beginning of each production period cause a decline in production levels. (JEL D44, C92)

Suggested Citation

  • Owen R. Phillips & Amy M. Nagler & Dale J. Menkhaus & Christopher T. Bastian, 2010. "Experimental Work On Subsidies, Moral Hazard, And Market Power In Agricultural Markets," Contemporary Economic Policy, Western Economic Association International, vol. 28(4), pages 488-501, October.
    • Handle: RePEc:bla:coecpo:v:28:y:2010:i:4:p:488-501
    DOI: 10.1111/j.1465-7287.2009.00187.x
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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