Evidence of Distortionary Effects of Decoupled Payments in U.S. Indica Rice Production

Using a generalized method of moments technique for dynamic panels we estimate the acreage response of indica rice production in the U.S. to decoupled payments under the 1996 and 2002 farm bills. We find that these payments exert significant effects on the number of acres planted and, although the response is inelastic, a given change in decoupled payments may have a greater effect on acreage planted than an equal change in payments directly linked to output. Thus, even purely decoupled payments may be vulnerable to WTO sanction or de minimis limits. This research also suggests that the subsidy formula in the proposed 2014 farm bill will have a reduced distortionary effect compared to existing policies. Copyright International Atlantic Economic Society 2014