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How Much Do Decoupled Payments Affect Production? An Instrumental Variable Approach with Panel Data

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  • Weber, Jeremy G.
  • Key, Nigel D.
Abstract
Agricultural support payments that cause no or minimal production distortions are exempt from World Trade Organization restrictions. If and how much decoupled payments, such as direct payments in the U.S., affect agricultural production remains an open empirical question with implications for policy. We use multiple years of the Census of Agriculture to estimate the aggregate supply response to changes in direct payments. To identify an exogenous source of variation in payments we exploit a provision of the 2002 Farm Act that departed from previous policy by making oilseeds eligible for direct payments, thus increasing payments to areas that historically produced more oilseeds. Using a sample of ZIP codes that accounts for more than eighty percent of the national value of production of program crops, our instrumental variable estimates, in contrast to OLS estimates, suggest that changes in payments over the period 2002 to 2007 had little effect on aggregate production.

Suggested Citation

  • Weber, Jeremy G. & Key, Nigel D., 2011. "How Much Do Decoupled Payments Affect Production? An Instrumental Variable Approach with Panel Data," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 103455, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea11:103455
    DOI: 10.22004/ag.econ.103455
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    References listed on IDEAS

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    1. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
    2. C. Edwin Young & Paul C. Westcott, 2000. "How Decoupled Is U.S. Agricultural Support for Major Crops?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(3), pages 762-767.
    3. Hisham El-Osta & Ashok Mishra & Mary Ahearn, 2004. "Labor Supply by Farm Operators Under “Decoupled” Farm Program Payments," Review of Economics of the Household, Springer, vol. 2(4), pages 367-385, August.
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    Keywords

    Agricultural and Food Policy; Crop Production/Industries; International Relations/Trade;
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