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

  • Chau, Nancy H.
  • de Gorter, Harry

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://purl.umn.edu/127663
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Paper provided by Cornell University, Department of Applied Economics and Management in its series Working Papers with number 127663.

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Date of creation: Aug 2001
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Handle: RePEc:ags:cudawp:127663
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  1. 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.
  2. Moschini, GianCarlo & Sckokai, Paolo, 1994. "Efficiency of Decoupled Farm Programs Under Distortionary Taxation," Staff General Research Papers 690, Iowa State University, Department of Economics.
  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. 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.
  5. Gisser, Micha, 1993. "Price Support, Acreage Controls, and Efficient Redistribution," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 584-611, August.
  6. Rucker, Randal R & Thurman, Walter N & Sumner, Daniel A, 1995. "Restricting the Market for Quota: An Analysis of Tobacco Production Rights with Corroboration from Congressional Testimony," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 142-75, February.
  7. Keith Collins & James Vertrees, 1988. "Decoupling and U.S. Farm Policy Reform," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 36(4), pages 733-745, December.
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