Bias and Scale Effects of Direct Government Payments

Abstract

While input factor use may be neutral, biases in which there is an adjustment in the relative returns/use of various factors of production is of particular interest due to its ability to reallocate income between owners of factors of production. Through the use of a translog cost function, the impact of aggregate direct government payments upon agricultural input use in the US is considered between 1948-1994. Results from this analysis suggest that there is aggregate bias in factor use in agriculture between 1948 and 1994. Furthermore, these results indicate that a portion of the observed technological bias may be accounted for by direct payments, and that this bias varies across inputs. The results of this research will be of interest to policy makers, and agricultural practitioners. Incorporating the potential impact of bias from direct payments into policy dialogue will permit an improved consideration of the impact of direct payments upon the agricultural sector. Further, improved awareness and understanding of direct payments upon production scale and input decisions would permit better forward planning by both agricultural producers and those industries which supply the agricultural sector.