NONPECUNIARY BENEFITS TO FARMING AND DECOUPLED PAYMENTS

Abstract

The first part of this paper presents a simple labor supply and production model wherein farmers with diminishing marginal utility of income derive nonpecuniary benefits from farming. We use the model to show how lump-sum or decoupled government payments could have positive and substantial effects on the supply of agricultural products. The result is simple and intuitive: payments allow those who enjoy farming to continue farming while maintaining a reasonably high living standard. Without payments, a lower living standard leads to higher marginal utility of income, making higher off-farm wages more desirable than lower on-farm wages plus non-pecuniary benefits from farming. Farmers respond to a reduction in payments by shifting their labor off-farm or exiting farming. This effect on labor supply and production is potentially much larger than effects predicted by earlier theoretical models that rely on utility with declining absolute risk aversion. The second part of this paper estimates the hourly nonpecuniary benefits to farming, for farms where the operator or spouse works off-farm, by comparing returns to household labor on-farm and off-farm. Results indicate substantial nonpecuniary benefits to farming. The empirical findings support a necessary (though not sufficient) condition for lump-sum payments having a substantial influence on production via an income effect.Decoupled payments, government payments, nonpecuniary benefits, labor supply, trade, Agricultural and Food Policy,