Allocation Effects of Policy Reform: A Micro-Simulation of Macro-Model Results for the United States

By changing marginal prices and therefore production incentives, removal of government payments will result in a re-allocation of factors of production as farm households pursue alternative economic opportunities. At the economy-wide level these impacts are small, but closer inspection reveals that some household-level impacts will be larger and other households will be affected little if at all. The underlying heterogeneity of the agricultural sector results in variable adjustment along two dimensions. First, survey data show that payments are not evenly distributed so their removal does not have a uniform impact across the sector. Second, even if payments were evenly distributed, factor endowments are not, so that ability to enter into alternative enterprises and employment opportunities varies as well. Using micro-data from a national survey of farm households, we simulate the effects predicted by a disaggregated CGE due to removal of government payments. By bringing to the forefront the distributional character of farm and nonfarm labor income, other factor income, and tax payments, our micro-simulation approach can be a valuable tool for understanding the relationship between policy incidence and response, an issue sure to arise in implementing policy reform.