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The Efficiency of Direct Payments versus Tax Reductions under Uncertainty

  • Goetz, Renan U.


  • Keusch, Alois
  • Ribas-Tur, Joan

This paper analyzes the optimal behavior of farmers in the presence of direct payments and uncertainty. In an empirical analysis for Switzerland, it confirms previously obtained theoretical results and determines the magnitude of the theoretical predicted effects. The results show that direct payments increase agricultural production between 3.7% to 4.8%. Alternatively to direct payments, the production effect of tax reductions is evaluated in order to determine its magnitude. The empirical analysis corroborates the theoretical results of the literature and demonstrates that tax reductions are also distorting, but to a substantially lesser degree if losses are not offset. However, tax reductions, independently whether losses are offset or not, lead to higher government spending than pure direct payments.

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Paper provided by Department of Economics, University of Girona in its series Working Papers of the Department of Economics, University of Girona with number 8.

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Date of creation: Jun 2003
Date of revision:
Handle: RePEc:udg:wpeudg:008
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  1. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
  2. Hans Binswanger, 1981. "Attitudes toward risk: Theoretical implications of an experiment in rural india," Artefactual Field Experiments 00010, The Field Experiments Website.
  3. 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.
  4. Uri Regev & Nikolaus Gotsch & Peter Rieder, 1997. "Are Fungicides, Nitrogen And Plant Growth Regulators Risk-Reducing? Empirical Evidence From Swiss Wheat Production," Journal of Agricultural Economics, Wiley Blackwell, vol. 48(1-3), pages 167-178.
  5. Goetz, R U, 1993. "Land Allocation under Consideration of Weather-Induced Crop Yield Variations: Decision Support by a Crop Yield Simulation and Risk Analysis Model (ERM)," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 20(2), pages 199-221.
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