Ex Ante Evaluation of Alternative Agricultural Policies in Laboratory Posted Bid Markets

Abstract

Decoupled payments to producers are among reforms in U.S. farm subsidy programs that have been advanced by policy analysts (Orden 2007). These reforms follow an interest in in creasing market orientation in the agricultural sector and minimizing the distorting effects as sociated with tying production decisions and government payments. Decoupled payments are fixed-income transfers independent of the farmer's production choices, output levels, or market conditions. These income transfers do not change per unit returns, so theoretically, they have no direct effect on production deci sions (Beard and Swinbank 2001). One decou pled policy tool receiving attention is a bond. Producers in receipt of a bond would garner a guaranteed stream of income during a transition period of fifteen to twenty five years in exchange for giving up all fu ture government program subsidies. This bond would have financial value and could be sold over its life, allowing producers to receive in come annually or in a lump sum (Orden and Diaz-Bonilla 2005). As policymakers search for options that pro vide nontrade distorting income transfers to agricultural producers, ex ante analyses must be conducted to avoid policy trial and error. There is little empirical evidence regarding how such policies might impact production decisions and what the potential market im pacts might be, given producer's behavior. Our research objective is to assess the potential direct market impacts of a decoupled pol icy alternative called a buyout bond, using experimental economics methods, specifically laboratory markets, to investigate the issue.