Experimental Work on Subsidies, Moral Hazard, and Market Power in Agricultural Markets
14 Pages Posted: 15 Sep 2010
Laboratory markets are created to capture the important features of agricultural commodity markets. Sellers make production decisions and hold inventories before goods are sold. In a posted-bid auction environment, price supports create a moral hazard for sellers. Part of the price-support subsidy is transferred to buyers in the form of lower prices, which are close to those predicted by the buyers' Cournot level. The subsidy program is expensive for this reason. Lump-sum payments correct the moral hazard problem and are better at transferring income to sellers. However, transfers made at the beginning of each production period cause a decline in production levels.
JEL Classification: D44, C92
Suggested Citation: Suggested Citation