Incomplete Markets and Government Agriculture Policy

Robert Innes () and Gordon Rausser

American Journal of Agricultural Economics, 1989, vol. 71, issue 4, 915-931

Abstract: This paper investigates the welfare effects of several stereotypical agricultural policies in an economy with production risk and incomplete contingent claim markets. The policies analyzed include target price/deficiency payment programs (the Brannan Plan), production controls (the Cochrane Plan), and land set-asides. When there is no trading in contingent claims and when economic parameters take on values characteristic of staple food markets, the paper finds that a joint Brannan Plan—production control program is often welfare increasing. However, production controls on their own tend to be welfare decreasing. In addition, land set-asides are generally welfare reducing, even in the presence of a Brannan plan. These results are derived analytically in a simple equilibrium model. They are illustrated with a numerical example which demonstrates that welfare benefits from typical agricultural policy interventions can be large.

Date: 1989
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