AGRICULTURAL POLICY AND PRODUCTION IN THE PRESENCE OF RISK AND INCOMPLETE FINANCIAL MARKETS

Abstract

Economic interventions are rarely free of debate, hence it should come as no surprise that governmental agricultural policies are usually surrounded in controversy. A topic of debate in the World Trade Organization (WTO) is how to maintain the fragile balance between two opposite objectives: the need of governments to protect their farmers and the need for a subsidy system which does not distort farmers’ production decisions. Lump-sum transfers to farmers are commonly believed to affect the production choices of farmers in the presence of risk and uncertainty. Chapter 1 shows that if farmers have off-farm investment and employment opportunities, production decisions are decoupled from lump-sum subsidies in the presence of risk and uncertainty. The results are reconciled with existing results by showing that previously identified production adjustments are portfolio adjustments. Chapter 2 contributes to the debate surrounding agricultural policy support for farmers and the potential distortionary effects of area payments. Area payments can affect production decisions via land allocation. I show theoretically how the timing of these payments can weaken the link between area payments and production. The theoretical predictions are supported by the empirical findings. Chapter 3 explores the trade-off between health and food consumption, and the effectiveness of health interventions such as taxing unhealthy foods. Rational agents maximize utility over health and consumption of healthy and unhealthy foods, while health is a function of discretionary and non discretionary calories and nutrients. Calories are not available for purchase in the market, thus their pricing is derived via a ``household'' production technology used to convert healthy and unhealthy foods into health outcomes. Additionally, consumers face a physiological constraint, a minimum calorie intake, which has further implications in terms of reducing potential health benefits associated with governmental interventions, such as taxing high-calorie foods. The future budget available to consumers depends on the consumption of discretionary calories. The theoretical model is calibrated using financial and consumption data reflecting farmworkers's food consumption in the US.