The Equilibrium Impact of Agricultural Support Prices and Input Subsidies

Pubali Chakraborty, Anand Chopra and Lalit Contractor

No 123, Working Papers from Ashoka University, Department of Economics

Abstract: We study the implications of agricultural price support programs, which offer a minimum price predominantly to farmers of staple crops, and farm input price subsidies for consumer welfare and misallocation, measured as the productivity gap between agriculture and non-agriculture. We develop a dynamic general equilibrium model with heterogeneous agents, financial frictions and endogenous occupational sorting between two sectors: agriculture and non-agriculture, and two crops: staples and cash crops. The government procures staple crops at predetermined prices and distributes them as free rations while also subsidising farm inputs. The model is calibrated to match a mix of moments and quasi-experimental evidence pertaining to the Indian economy. Our results suggest that in the absence of the minimum support price policy, labour reallocates from the agriculture to the non-agriculture sector, slightly raising aggregate output and reducing misallocation. A reduction of the input price subsidy lowers agricultural and non-agricultural output and exacerbates misallocation. Policies that replace the support price or input subsidy programs with budget-equivalent income transfers improve welfare.

Keywords: agriculture; general; equi-librium; Heterogeneous; Agents; input; subsidies; misallocation; price; support; welfare (search for similar items in EconPapers)
Pages: 72
Date: 2024-09-10
New Economics Papers: this item is included in nep-agr and nep-dge
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