The Equilibrium Impact of Agricultural Support Prices and Input Subsidies
The Equilibrium Impact of Agricultural Support Prices and Input Subsidies
We study the implications of agricultural price support programs, which offer a minimum price predominantly to farmers of staple crops, and farm input price subsidies for consumer welfare and misallocation, measured as the productivity gap between agriculture and non-agriculture. We develop a dynamic general equilibrium model with heterogeneous agents, financial frictions and endogenous occupational sorting between two sectors: agriculture and non-agriculture, and two crops: staples and cash crops. The government procures staple crops at predetermined prices and distributes them as free rations while also subsidising farm inputs. The model is calibrated to match a mix of moments and quasi-experimental evidence pertaining to the Indian economy. Our results suggest that in the absence of the minimum support price policy, labour reallocates from the agriculture to the non-agriculture sector, slightly raising aggregate output and reducing misallocation. A reduction of the input price subsidy lowers agricultural and non-agricultural output and exacerbates misallocation. Policies that replace the support price or input subsidy programs with budget-equivalent income transfers improve welfare.