Farm Subsidy Incidence in the Presence of Bertrand Competitors of Complementary Factors of Production: A Theoretical Approach

We analyze the impact of various subsidy policies using a two-stage dynamic game between a buyer (intended beneficiary) and two Bertrand suppliers of technical complementary inputs. Though we identify market power is one of the root causes of subsidy incidence, we also find that input product substitutability plays a much larger role. Furthermore, we identify that subsidy incidence occurs across multiple input markets. However, the multiplier effect of the subsidy enhances sector welfare, though disproportionally in favor of the input suppliers.