Agricultural policy analysis under costly enforcement : an economic analysis of cheating

Agricultural policy analysis has traditionally taken place under the implicit assumption of perfect and costless policy enforcement. The objective of this study is to introduce policy enforcement costs into the economic analysis of output quotas, deficiency payments and decoupled area payments. Policy design and implementation is modeled in this thesis as a sequential game between a regulator who designs the farm program, an enforcement agency that determines the level of policy enforcement, and the farmer who makes the production and cheating decisions. Analytical results show that cheating on output subsidies and decoupled area payments results in welfare gains for producers that constitute a direct transfer from taxpayers. When, however, an output quota scheme is in effect, above-quota production results in losses for producers and welfare gains for consumers. The penalties on detected cheating and the policy enforcement costs mean that, contrary to what is traditionally believed, taxpayers have an interest in the manner output quotas are introduced and enforced. The weight placed by program enforcers on producer welfare determines policy enforcement, cheating, and government intervention. The greater is the importance of producer welfare for policy enforcers, the lower is equilibrium enforcement, and the greater is farmer misrepresentation under an output subsidy or a decoupled area payment scheme. Reduced enforcement and increased misrepresentation result in lower government payments required for a given surplus to be transferred to producers. The reverse is true when a production quota is in effect. The introduction of enforcement costs and cheating affects the transfer efficiency and the normative ranking of the farm programs. The efficiency of output subsidies and decoupled area payments in transferring income to producers is maximized when the political preferences of policy enforcers and the regulator coincide. The transfer efficiency of output quotas under alternative political preferences of policy enforcers is determined by a trade-off between the resource costs of intervention and the monitoring costs. Ultimately, the ranking of the policy instruments in terms of transfer efficiency depends on market conditions, the deadweight losses from taxation, the extent of intervention, the political preferences of policy enforcers, and the size of enforcement costs