Tijun Fan, Qi Feng, Yuanchen Li, J. George Shanthikumar, Yifan Wu

Management Science, available online in Articles in Advance

Recommend Reason

Though increasing attention has been paid to subsidy programs in the OM community, the focus has been given to understanding the implications on the producer’s incentives in monopoly or duopoly markets. The agriculture industry often consists of a highly fragmented producer base, particularly in developing countries. The design of the subsidy programs must consider not only the efficient spending of the government budget to raise outputs, but also the fairness in farmers’ wealth distributions, the utilization of resources, and the welfare of society. The objective of this study is to understand the responses of the farmers’ market to different subsidy programs and to evaluate the implications on the key performance indicators to guide the policy design.

About the Author

Tijun Fan, School of Business, East China University of Science and Technology

Qi Feng, Krannert School of Management, Purdue University

Yuanchen Li, Advanced Institute of Business, Tongji University

J. George Shanthikumar, Krannert School of Management, Purdue University

Yifan Wu, School of Business, East China University of Science and Technology

Keywords

subsidy and tax; agriculture products; output and wealth distribution; majorization order

Brief Introduction

In this study, we examine four types of subsidies. A planting subsidy is paid to a farmer based on the amount of input, and a harvesting subsidy compensates a farmer for the cost incurred during the process of output collection and distribution. The government may also offer a combined subsidy under which a farmer gets paid for both plantation and harvesting, or offer a selective subsidy under which a farmer can choose to be subsidized on either plantation or harvesting but not both. In addition to examining the efficiency of budget spending and social welfare, two common performance measures studied in various contexts, we thoroughly analyze the implications of subsidies on the output and wealth distributions among the farmers. In general, subsidizing on harvesting or overly compensating on plantation can increase the disparity among the farmers, while an appropriate level of planting subsidy helps to balance the distributions of the farmers’ output and profit. A comprehensive evaluation of the government’s policies reveals that the harvesting subsidy, while inducing the most dispersed output and profit distributions, leads to the most efficient use of input resources and the highest social welfare. The planting subsidy, though being the most effective in balancing the farmer income for a moderate output increase, performs poorly in budget spending, resource usage, and welfare generation when the government sets an aggressive target for output increase. In such a situation, the combined subsidy can offer the most evenly distributed farmer income, with the least amount of budget needed to achieve the output target.

Link: https://doi.org/10.1287/mnsc.2023.4749