Cross-subsidization Due to Inframarginal Support in Agriculture: A General Theory and Empirical Evidence

A general theory of cross-subsidization due to inframarginal support is developed. Two sources of output distortion are identified: exit deterrence and extramarginal output. Some firms would not be in business without the subsidy. Cost savings due to declining average costs are always greater than the losses incurred where price equals marginal cost. Moreover, it is theoretically possible for inframarginal subsidies to expand output more than equivalent fully coupled subsidies. Empirical analysis of U.S. dairy subsidies isolates these components of cross-subsidization and finds distortions from inframarginal support to be substantial, with implications for trade negotiations, dispute settlement, and policy formulation. Copyright 2008, Oxford University Press.

Impactos na produção de políticas "desacopladas" na agricultura norte-americana: o papel do risco

Nos últimos anos, esforços têm sido feitos no sentido de modificar as políticas de apoio à agricultura para minimizar os efeitos distorcivos sobre a produção e o comércio internacional. Ênfase tem sido dada às políticas desacopladas de preços e/ou produção, sobretudo às transferências diretas de renda aos agricultores, consideradas neutras em relação às decisões de produção corrente. O argumento é de que estas políticas têm efeitos mínimos na produção atual, pois não influenciam os retornos marginais da cultura, já que seus pagamentos independem da produção corrente. Este estudo mostra que, ao contrário, as decisões de produção correntes são afetadas pelas políticas de transferência de renda, especialmente através dos efeitos diretos sobre a percepção de risco dos agricultores. Estes efeitos, divididos em efeito-renda e efeito-segurança, estimulam o aumento da área plantada e assim, têm efeitos sobre a produção e os preços.<br>In the last few years, efforts have been made to modify agricultural support policies in order to minimize the distortive impacts on product level and on international trade. Emphasis has been given to decoupled payments, considered neutral to current production decisions. The main argument is that such payments do not influence the crop marginal returns because they are not based on current production. This article shows, however, that current production decisions are influenced by decoupled payments through direct impacts on risk perception by farmers. These effects, classified as income effect and insurance effect, stimulate the increase in planted area and, therefore, have impacts on production and price levels

Do Direct Payments Distort Producers' Decisions? An Examination of the Farm Security and Rural Investment Act of 2002

Do direct payments alter operators' acreage decisions? The authors use an event study with individual-level data in a panel-data setting to examine how an exogenous change in direct payments affects individual farmers' production decisions. They track changes in acreage across time and examine whether an exogenous, government implemented Act that allowed farmers to update base acres altered individual operators' acreage decisions. Results suggest that direct payments do change individual acreage decisions, ranging from approximately 44 to 78 acre increases (9 to 16% changes). Their results have no implications for aggregate production impacts. Copyright 2010, Oxford University Press.