Front-Loading Agricultural Subsidies: Quantifying Public Savings

Abstract

Abstract Reforms to agricultural policy have been stalling in OECD economies. In this paper, we quantify the potential for public savings from switching to an optimal transfer system in small open economies. Following the insights from the literature on repeated moral hazard, optimal subsidies are front-loaded, which provides stronger incentives for farmers to transition out of agriculture, compared to the existing policies. In our counterfactual experiments, we find government savings of 6% for Chile, 45% for Japan, 24% for Switzerland, and 51% for Turkey. In addition, optimal subsidies more than double the speed of the transition of employment out of agriculture.