The Macroeconomic Impact of Agricultural Input Subsidies

Governments operate agricultural input subsidy programs worldwide. Using a general equilibrium heterogeneous agent model featuring transaction costs, we quantitatively evaluate the macroeconomic consequences of such policies. Focusing on Malawi’s Farm Input Subsidy Program, we find that while this large program decreases undernutrition, it reduces welfare by exacerbating misallocation and benefiting the wealthier urban population.We show that partial equilibrium analysis leads to contrary conclusions and that halving the subsidy rate or investingin infrastructure improves outcomes. Finally, we demonstrate that the microdata from Malawi and cross-country data from Sub-Saharan Africa are consistent with the predictions of our model.