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Disentandling the Consequences of Direct Payment Schemes in Agriculture on Fixed Costs, Exit Decisions and Output

Nancy Chau and Harry de Gorter ()

No 127663, Working Papers from Cornell University, Department of Applied Economics and Management

Abstract: This paper goes beyond orthodox considerations of direct payment e®ects on agricultural output, by highlighting the role of subsidies in a®ecting individual producers' ability to cover ¯xed costs, and in distorting the volume of aggregate production and net trade by implicitly discouraging exits. The theoretical model considers both taxpayer and consumer ¯nanced decoupled direct payment schemes and compares them to a coupled production subsidy. In terms of possible producer responses to direct payments, we propose an analytical framework of production decision-making in the presence of a stochastic distribution of ¯xed costs across representative farms. We show that decoupled payments in theory can have a larger e®ect on output than coupled payments. The model explicitly recognizes three consequences of domestic support: (a) induce exit or entry; (b) bias production incentives to domestic markets; and (c) cross-subsidize export in global markets. An empirical model of the U.S. wheat sector is developed to illustrate the relative potential impacts of coupled versus decoupled payments on output through the e®ects on a farmer's ability to cover ¯xed costs and hence exit decisions.

Keywords: Demand; and; Price; Analysis (search for similar items in EconPapers)
Pages: 49
Date: 2001-08
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http://ageconsearch.umn.edu/record/127663/files/Cornell_Dyson_wp0116.pdf (application/pdf)

Related works:
Journal Article: Disentangling the Consequences of Direct Payment Schemes in Agriculture on Fixed Costs, Exit Decisions, and Output (2005) Downloads
Working Paper: Disentangling the Consequences of Direct Payment Schemes in Agriculture on Fixed Costs, Exit Decision and Output (2001) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:ags:cudawp:127663

DOI: 10.22004/ag.econ.127663

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