Farm Support and Market Distortion: Evidence from India
American Journal of Agricultural Economics, Forthcoming
57 Pages Posted: 10 Jun 2020 Last revised: 8 Aug 2022
Date Written: July 31, 2021
Using a recently implemented Price Deficiency Payments (PDP) policy in India, we examine how PDP affects farm-gate prices and crop supply. We document a new channel, the fall in reservation price of farmers under PDP, behind the decline in farm-gate prices. This impact depends on the magnitude of the deficiency payments and can lead to a supply glut and price crash. Empirically, the scheme led to a 4 percent decrease in farm-gate prices and a 51 percent increase in market arrivals for Black-gram, a crop with a high magnitude of PDP. Using bid-level data on crop auctions, we rule out collusion among the market participants, another potential channel for price crash under PDP. The effects of the policy are transitory and disappear after the policy is withdrawn. In terms of welfare effects, this scheme is associated with a monetary loss of INR 1 billion.
Keywords: price deficiency, price loss coverage, farm support, equilibrium price, collusion
JEL Classification: Q11, Q14, Q18
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