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GTAP Resource #1772

"Do Direct Payments Have Intertemporal Effects On U.S. Agriculture?"
by Somwaru, Agapi, Terry Roe and Xinshen Diao

The 1996 Federal Agriculture Improvement and Reform (FAIR) Act introduced new instruments of producer supports, including fixed payments, known as “production flexibility contract” payments (PFC), tied to historical “base” acreage and yields. The general issue is whether the PFC payments or decoupled payments to farmers have inter-temporal effects on resource allocation and production to the extent that they have effects on agricultural markets. The purpose of this paper is to contribute to this debate by considering the inter-temporal effects of decoupled payments on market behavior.

An economy-wide approach is used because the market effects of those taxed to provide the transfer might offset the market effects of the recipients. If this result obtains, PFC payments can be thought of as an efficient policy instrument to transfer resources from one segment of the population to another with no dead weight losses. Since the real economy is obviously complicated and encumbered with incomplete markets that makes this a complex question, our contribution lies in showing the circumstance, over time, under which market distortions are minimized, and for the case where capital markets are not complete and/or liquidity constraints prevail in agriculture, just how distorting might these payments actually be.

We find that, in the short to intermediate run, direct payments tend to cause capital deepening and to increase agricultural output. However, these effects are small. They cause aggregate agricultural production to rise by less than 0.2 percent in the short run. Direct payments are a relatively efficient policy instrument for transferring income from the rest of the economy to farmers, efficient in the sense that they have relatively small effects on agricultural resource allocation and production. In the long run, payments cause no resource allocation and output effects. The only long-term effect of payments is to increase land values and land rental rates.

Resource Details (Export Citation) GTAP Keywords
Category: 2005 Conference Paper
Status: Published
By/In: Presented at the 8th Annual Conference on Global Economic Analysis, Lübeck, Germany
Date: 2005
Created: Somwaru, A. (5/2/2005)
Updated: Somwaru, A. (5/2/2005)
Visits: 3,062
No keywords have been specified.

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