Supply Response to Countercyclical Payments and Base Acre Updating under Uncertainty: An Experimental Study

Abstract

We design an experiment to simulate how people make agricultural production decisions under three policy scenarios, each incorporating direct payments (DPs): (a) price uncertainty without countercyclical payments (CCPs); (b) price uncertainty with CCPs; and (c) price uncertainty, CCPs, and uncertainty regarding base acreage updating. Results are the CCP program and perceived possibility of future base updating created incentives for subjects to invest more in program (base) crops, despite payments being decoupled from current production decisions. Those choosing to reduce revenue risk by increasing plantings of base crops may face reduced incomes, suggesting the efficiency of crop markets may be diminished. Copyright 2007, Oxford University Press.

Economic Experiments as a Tool for Agricultural Policy Evaluation: Insights from the European CAP

“…However, the key finding from the experiment with students is that investment behavior did not differ significantly with respect to the presence of a price floor. In the U.S. context, McIntosh et al () investigate supply responses to countercyclical payments (CCPs) given to farmers in a world of price uncertainty as part of the U.S. Farm Bill. The experimental evidence suggests that such payments lead to greater income certainty but less efficient production decisions and (possibly) higher government payments.…”

“…The experimental evidence suggests that such payments lead to greater income certainty but less efficient production decisions and (possibly) higher government payments. More importantly, the results from McIntosh et al () call into question whether CCPs are really decoupled. Their results suggest that while CCPs were supposed to be decoupled, the introduction of CCPs into the lab led to increased production of program crops.…”

The Effects of Policy Expectations on Crop Supply, with an Application to Base Updating

“…Recent articles have attempted to model the effect of expected base updating for a single program crop on current production (e.g., McIntosh, Shogren, and Dohlman 2007;Bhaskar and Beghin 2010). However, such studies that model the effect of expectations about policy changes by considering a single crop neglect the full set of policy expectations that affect production of that crop, just as models that ignore cross-price effects neglect the full set of incentives that affect production decisions.…”

Evolution of the Economics of Agricultural Policy

“…For example, economists continue to consider how farm subsidies affect input markets, including prices of variable farm inputs and other inputs that may be quasi-fixed, such as human capital, R&D embodied in new seeds, and land (see, e.g., Kirwan 2009;Alston 2007). Supply response in the context of farm subsidy programs remains important, and new models and estimates are emerging on how complex programs, including those with indirect production incentives, affect planted acreage and output (see, e.g., McDonald and Sumner 2003;Goodwin and Mishra 2006;McIntosh,Shogren,and Dohlman 2007).…”