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

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.


Issue Date:
2001-08
Publication Type:
Working or Discussion Paper
Record Identifier:
http://ageconsearch.umn.edu/record/127663
PURL Identifier:
http://purl.umn.edu/127663
Total Pages:
49
JEL Codes:
F16; J58
Series Statement:
WP
2001-16




 Record created 2017-04-01, last modified 2018-09-13

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