Speaker: Tristan du Puy

Title: An Empirical Model of Agricultural Subsidies with Environmental Externalities 

Abstract: Agricultural subsidies are ubiquitous around the world, representing at least $638 billion per year in direct transfers. In the European Union, they account for 45\% of all federal expenditures since 1980. At the same time, the agricultural industry is a major source of environmental disruptions, in part because of its use of chemicals, which translate into air, soil and water pollution. Subsidies are large, but we know little about how they influence the equilibrium use of agricultural chemicals. In this project I leverage farm-level administrative data to study their impact on chemical pollution and economic surplus. A shift-share design based on the largest reform of EU subsidies to date shows how concomitant decreases in subsidy levels and changes in their design reduced farm profit, and led to exit and reallocations. The reform also lowered both farm-level chemical use and water pollution as measured via remote sensing. In an empirical model of farm dynamics, where producers differ in efficiency and propensity to pollute, I find that more efficient farms pollute on average more. Subsidies that lower the profitability threshold for market survival can reduce the average chemical efficiency of farms as well as pollution, but will raise costs. Those that shift the incentives for the use of polluting inputs can reproduce part of the welfare gains of Pigouvian taxation.