The economics of coupled farm subsidies under costly and imperfect enforcement

This study relaxes the assumption of perfect and costless policy enforcemen t found in traditional agricultural policy analysis and introduces enforcem ent costs and cheating into the economic analysis of output subsidies. Poli cy design and implementation is modeled in this paper as a sequential game between the regulator who decides on the level of intervention, an enforcem ent agency that determines the level of policy enforcement, and the farmer who makes the production and cheating decisions. Analytical results show th at farmer compliance is not the natural outcome of self-interest and comple te deterrence of cheating is not economically efficient. The analysis also shows that enforcement costs and cheating change the welfare effects of out put subsidies, the efficiency of the policy instrument in redistributing in come, the level of government intervention that transfers a given surplus t o agricultural producers, the socially optimal income redistribution, and t he social welfare from intervention. (C) 2000 Elsevier Science B.V. All rig hts reserved.