Three Essays on the Production Effects of Decoupled Payments: Do Decoupled Payments Matter for Acres and Yields?

Abstract

Conventional wisdom suggests that if decoupled payments do not distort market incentives, they should not distort production or trade. But the literature has identified several potential “coupling†mechanisms that suggest theory and practice are not in accord. Using both estimation and simulation methods, we analyze the effect of decoupled payments on farmers’ decisions in the presence of one such mechanism, credit constraints. Intuitively, as payments enhance the liquidity and/or the collateral of credit constrained farmers, additional investment in production is allowed to occur. We estimate the marginal effect of decoupled payments on total, owned, and pasture acres, and on acres of corn, sorghum, soybeans, and wheat and observe whether payments matter more for more leveraged farmers. Our ability to observe farms over time allows us to improve on the existing literature by controlling for farm-specific unobserved effects. In an effort to analyze the income stabilization aspect of these payments we further estimate their effect on farm household consumption expenditures. The significant acreage effects and insignificant marginal propensity to consume suggest payments are being not put to the policy makers’ intended use. We also extend the existing literature by using simulation methods in an expected utility maximization framework to evaluate the effects of doubling the amount of payments received and of recently proposed tighter payment limits on the typical Kansas wheat farmer’s acreage and borrowing decisions. While tighter limits do not appear to matter, the collateral boosting effect of payments allows farmers to put more acres into production. Finally, we estimate the ability of farm characteristics to explain differences in crop yield performance. Our results reveal the potential for decoupled payments to boost relative yields and give an unfair advantage to their recipients. This may become an issue in future WTO discussions over the distortionary effects of decoupled payments.