Industrial Policy with Development Characteristics: Fertilizer Policy in Times of Crisis

Wyatt Brooks and Kevin Donovan

No 35126, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study time-consistent optimal policy when undiversified owner-operators face financial frictions and a planner with limited instruments. We apply it to fertilizer subsidies, one of the largest sector-specific policy instruments in the developing world and whose price is becoming increasingly volatile. We collect household-level data from 444 rural Rwandan villages from 2020 - 2024 and exploit the doubling of fertilizer prices after Russia’s invasion of Ukraine. Relative to less fertilizer-intensive villages, more fertilizer-intensive villages experience 30 percent lower fertilizer spending, 21 percent lower harvests, and 11 percent higher output prices. These patterns discipline key model elasticities. The optimal response balances a desire to reallocate production toward less fertilizer-dependent villages, while dampening the consumption loss in more fertilizer-dependent villages. Quantitatively, these forces offset and the subsidy remains at 10 percent before and after the shock.

JEL-codes: O10 O11 O4 (search for similar items in EconPapers)
Date: 2026-04
Note: DEV
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