The decoupling of farm programs: Revisiting the wealth effect

Recent reforms of agricultural policies in developed countries introduced direct payments to the detriment of traditional production enhancing instruments. Whereas these new instruments can influence production through several effects, current empirical studies do not show any significant impact on production; direct payments mainly increase land values. In this article, we revisit the evaluation of the coupling effects passing through the wealth of agricultural households. The initial wealth of these agents, while being mainly in form of land asset holding, is always assumed to be fixed. On the contrary we show theoretically and empirically that, once the impact of farm programs on initial wealth is properly accounted for, the measure of the coupling effects is considerably increased for direct payments and more much marginally for traditional policy instruments. We illustrate the impact of this initial wealth actualisation through a simulation of the suppression of the US corn policy. The impact of this policy was underestimated by two thirds.

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 Record created 2017-04-01, last modified 2019-08-26

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