Analysis of the Chinese government's subsidy programs to restore the pork supply chain: The case of African swine fever

Abstract

Since African swine fever (ASF) was first detected in China in August 2018, it has killed more than one million pigs and caused pork prices to skyrocket. To address this, the Chinese government offers two farm subsidies: (i) the compulsory culling subsidy (CCS), which cushions losses from new outbreaks by compensating for pigs culled due to ASF, and (ii) the large-scale breeding subsidy (LBS), which maintains or increases farms’ breeding scales (BSs) by requiring a minimum BS. We develop a game-theoretic model to capture the underlying dynamics between the government and farms. In particular, farms have different production capacities and must decide their BSs under yield uncertainty due to possible new outbreaks. We analyze the optimal design of subsidy programs with an earmarked budget to maximize social welfare, and we examine the impacts on different stakeholders. Our analysis reveals several insights. First, the government should offer the CCS only if the budget is very constrained; otherwise, it should simultaneously offer the two subsidies and prioritize compensating farm losses by providing a good CCS. Second, the optimal subsidy programs can increase consumer surplus regardless of the budget, and programs with a small or large budget can make all farms better off. However, small- and moderate-scale farms (that do not enroll in the LBS) will be worse off under these programs with a moderate budget. Third, the optimal subsidy programs can create positive net social value that is nondecreasing in the budget; hence, a win-win-win situation can be achieved by establishing a sufficiently large budget for these programs. Finally, we calibrate our model using Chinese pig industry data and provide further insights into ASF subsidy programs.