Input- vs. output-based farm subsidies in developing economies : farmer welfare and income inequality

Abstract

To alleviate farmer poverty in developing economies, two common farmer subsidy schemes are either input-based that intends to reduce farmers’ input purchasing costs or output-based that aims to lower farmers’ output processing costs. By analyzing a stylized model that captures yield heterogeneity across farmers who engage in quantity competition, we find that both schemes can improve farmers’ income. However, these two schemes generate different effects. First, the input-based subsidy scheme narrows the income gap between farmers, but the output-based scheme widens this gap. Second, the output-based subsidy scheme outperforms the input-based subsidy scheme in terms of total farmer income and farmer productivity. Overall, we find that low-yield farmers prefer input-based subsidies, while high-yield farmers prefer output-based subsidies. These results continue to hold even when the farmer’s yield rate is uncertain.