Acreage Response to Whole Farm Income Stabilisation Programmes

This article investigates whether Canadian whole farm programmes, which fall under the WTO category of Green Box subsidies, are truly production neutral. Theory suggests that with non-constant risk aversion, risky decisions can be influenced by both the level of expected wealth (i.e. the wealth effect) and the variability of wealth (i.e. the insurance effect). Unlike previous approaches, this article is able to extend a framework developed by Chavas and Holt to formally incorporate the insurance effect into the acreage allocation decisions. By applying the theoretical model to acreage data in the Canadian Prairies, the results reveal that the whole farm income stabilisation programmes had large impacts on acreage choices through wealth and insurance effects. From a WTO perspective, the results underline the inherent difficulty in designing programmes that will reduce the risk faced by farmers without altering behaviour.