The Decoupling of Farm Programs: Revisiting the Wealth Effect

Recent reforms of agricultural policies in developed countries have introduced direct payments as replacements for traditional production-enhancing instruments. Whereas these new instruments can, in principle, influence production through several channels, current empirical studies show no significant impact on production; direct payments mainly increase land values. In this article, we revisit the evaluation of the coupling effects passing through the wealth of agricultural households. The initial wealth of these agents, while mainly being in the form of land asset holding, is always assumed to be fixed. To the contrary, we show theoretically and through an empirical simulation exercise that once the impact of farm programs on initial wealth is properly accounted for, the measure of the coupling effects is not as negligible as found in previous studies. Copyright 2010, Oxford University Press.