Output-Oriented Agricultural Subsidy Design

Abstract

Many governments subsidize the agricultural industry, trying to raise the market outputs either for domestic needs or for export. In many countries, particularly developing countries, the producers' market may be fragmented, involving a large number of farmers with variable productivity levels. The format of subsidies can have significantly different implications for farmers in different market segments. In this study, we examine four types of subsidies. A planting subsidy is paid to a farmer based on the amount of input, and a harvesting subsidy compensates a farmer for the cost incurred during the process of output collection and distribution. The government may also offer a combined subsidy under which a farmer gets paid for both plantation and harvesting, or offer a selective subsidy under which a farmer can choose to be subsidized on either plantation or harvesting but not both. In addition to examining the efficiency of budget spending and social welfare, two common performance measures studied in various contexts, we thoroughly analyze the implications of subsidies on the output and wealth distributions among the farmers. In general, subsidizing on harvesting or overly compensating on plantation can increase the disparity among the farmers, while an appropriate level of planting subsidy helps to balance the distributions of the farmers' output and profit. A comprehensive evaluation of the government's policies reveals that the harvesting subsidy, while inducing the most dispersed output and profit distributions, leads to the most efficient use of input resources and the highest social welfare. The planting subsidy, though being the most effective in balancing the farmer income for a moderate output increase, performs poorly in budget spending, resource usage, and welfare generation when the government sets an aggressive target for output increase. In such a situation, the combined subsidy can offer the most evenly distributed farmer income, with the least amount of budget needed to achieve the output target.

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