Experimental Work on Subsidies, Moral Hazard, and Market Power in Agricultural Markets

14 Pages Posted: 15 Sep 2010

See all articles by Owen R. Phillips

Owen R. Phillips

University of Wyoming - College of Business - Department of Economics and Finance

Amy M. Nagler

University of Wyoming

Dale J. Menkhaus

University of Wyoming

Christopher T. Bastian

University of Wyoming

Abstract

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

Phillips, Owen R. and Nagler, Amy M. and Menkhaus, Dale J. and Bastian, Christopher T., Experimental Work on Subsidies, Moral Hazard, and Market Power in Agricultural Markets. Contemporary Economic Policy, Vol. 28, No. 4, pp. 488-501, October 2010, Available at SSRN: https://ssrn.com/abstract=1677086 or http://dx.doi.org/10.1111/j.1465-7287.2009.00187.x

Owen R. Phillips (Contact Author)

University of Wyoming - College of Business - Department of Economics and Finance ( email )

P.O. Box 3985
Laramie, WY 82071-3985
United States
307-766-2195 (Phone)
307-766-5090 (Fax)

Amy M. Nagler

University of Wyoming

Dale J. Menkhaus

University of Wyoming ( email )

Box 3434 University Station
Department of Applied Agricultural Economics
Laramie, WY 82071
United States
307-766-5128 (Phone)
307-766-5544 (Fax)

Christopher T. Bastian

University of Wyoming

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