The effects of land direct payment program on farm income and production practices

Abstract

Many countries of the world have implemented subsidy programs to maintain a minimum amount of farm production especially for rice. Agricultural support programs usually cause significant fiscal burdens on government budgets. These programs can be generally categorized into decoupled and coupled programs, and one longstanding research interest of previous literature is whether these programs are decoupled or coupled with farm production practices. In Taiwan, a unique land direct payment (LDP) program to rice farms was implemented to ease severe financial burden of the price support program with government purchase. In contrast to production control programs imposing quantity restrictions on farm production, this program is voluntary for rice farms, and participants are paid at a fixed rate per hectare of farmland. This paper examines the impacts of this program on farm income and farm production practices in Taiwan. The causal effect of the program is identified based on the exogenous rollout of the policy across multiple times and areas. We construct a dataset linking nationally representative rice farm surveys over several years and administrative records on program recipients to estimate the local average treatment effect of the program. We find that the effect is 4% of farm income. In addition, program participants rely less on price support programs and produce less rice and use less fertilizer, pesticide, and machinery. Although the LDP reduces rice production, we find that it causes overall government spending on the price support and direct payment programs to increase by 8.7% after the LDP.