Subsidy Incidence in the Presence of Bertrand Suppliers of Complementary Inputs: A U.S. Agricultural Example

Abstract

Past farm subsidy research has identified the occurance of subsidy incidence to only a single input factor market (land). We expand subsidy incidence literature to a partial equilibrium two-stage dynamic game between a price-taking buyer and two Bertrand complementary input suppliers. The buyer (farmer) is the target of the government subsidy. We find that a coupled subsidy results in higher input prices for both the affiliated coupled factor (land) and its nonaffiliated complementary factor (e.g. seed). Sector welfare and welfare distribution are highly influenced by input demand complementarity. Surplus for the receiver of the coupled subsidy increases as inputs become closer complements,while aggregate surplus distribution increasingly favors the input suppliers. However, increases in sector growth from coupled subsidies (mulitplier effect) increases as inputs become closer complements. Therefore, policy aimed at mitigating subsidy incidence may reduce sector growth.