EXPERIMENTAL WORK ON SUBSIDIES, MORAL HAZARD, AND MARKET POWER IN AGRICULTURAL MARKETS

Authors

  • OWEN R. PHILLIPS,

    1. Phillips: Department of Economics & Finance, University of Wyoming, Laramie, WY 82071-3985. Phone 1-307-766-2195, Fax 1-307-766-5090, E-mail owenphil@uwyo.edu
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  • AMY M. NAGLER,

    1. Nagler: Department of Agricultural & Applied Economics, University of Wyoming, Laramie, WY 82071-3354. Phone 1-307-766-5615, Fax 307-766-5544, E-mail anagler@uwyo.edu
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  • DALE J. MENKHAUS,

    1. Menkhaus: Department of Agricultural & Applied Economics, University of Wyoming, Laramie, WY 820713354. Phone 1-307-766-5128, Fax 1-307-766-5544, E-mail menkhaus@uwyo.edu
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  • CHRISTOPHER T. BASTIAN

    1. Bastian: Department of Agricultural & Applied Economics, University of Wyoming, Laramie, WY 82071-3354. Phone 1-307-766-4377, Fax 1-307-766-5544, E-mail bastian@uwyo.edu
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    • Support from the Paul Lowham Research Fund is gratefully acknowledged. This research was also supported under the United States Department of Agriculture, Economic Research Service/University of Wyoming Cooperative Agreement—“A New Generation of Farm Policy Tools: Identifying and Assessing Economic Implications” (USDA ERS N45104). Any opinions, findings, conclusions, or recommendations expressed in this paper are those of the authors and do not necessarily reflect the views of the funding sources.


Abstract

Laboratory markets are created to capture the important features of agricultural commodity markets. Sellers make production decisions and hold inventories before goods are sold. In a posted-bid auction environment, price supports create a moral hazard for sellers. Part of the price-support subsidy is transferred to buyers in the form of lower prices, which are close to those predicted by the buyers' Cournot level. The subsidy program is expensive for this reason. Lump-sum payments correct the moral hazard problem and are better at transferring income to sellers. However, transfers made at the beginning of each production period cause a decline in production levels. (JEL D44, C92)

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