Understanding agricultural subsidies and factor allocation: A general equilibrium analysis

Abstract

This study examines the general equilibrium effects of agricultural subsidies on factor allocation in China. We develop a multisector dynamic general-equilibrium model that incorporates labor and land market frictions and multiple subsidy types, calibrated with data from 2002 to 2021. Results indicate that subsidies generally drew labor and capital from the nonagricultural sector, creating distortions in interindustry factor markets while reducing agriculture's output share. Subsidies increased per capita agricultural capital and land area, raising labor productivity but lowering production efficiency. Policy simulations show that shifting a greater share toward machinery subsidies improves welfare and aggregate output, optimizing China's subsidy structure. Moreover, industrial technological progress, lower migration costs, and international trade alter the effectiveness of subsidies.