Decoupling farm policies: how does this affect production?
This paper studies the extent to which decoupled income support measures in agriculture can have production implications both at the extensive and intensive margins. We develop a theoretical framework that analyzes production responses of agricultural producers to apparently decoupled payments, by explicitly considering risk attitudes and uncertainty. We use farm-level data collected in Kansas to estimate the model. Technology and risk preference parameters are jointly estimated. Results show that though lump sum payments are not fully decoupled in the presence of risk and uncertainty, their effects on agricultural production are likely to be of a very small magnitude.
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