Subsidy Incidence in Factor Markets: An Experimental Approach

Abstract

Laboratory market experiments are used to estimate the incidence of a stylized subsidy in factor market negotiations with university student and agricultural professional subjects. In separate sessions with both groups, prices converged approximately four and a half tokens higher when a 20-token per-unit subsidy was paid to buyers; this equates to 44% of the predicted 10-token split. A proportional market incentive treatment clarifies this subsidy effect. Discrepancies between predicted and observed incidence are similar to previous empirical estimates of subsidy incidence in agricultural land rental markets. A behavioral anomaly as well as buyer-buyer market competition may contribute to experimental results.

Understanding Pollinator Habitat Conservation under Current Policy Using Economic Experiments

“…On net, evidence exists to support the idea that students can be representative. For instance, Nagler et al [41] find that student participants respond to experimental incentives in the same way as agricultural producers, the population of interest in the current study, which adds support to the generalizability of laboratory experiments (also see Falk and Heckman [37]). …”

“…Then, each session consisted of up to ten rounds [33]. To avoid end-game-effects, the participants were informed that the experiment had a random number of rounds [41]. As CP-42 requires a minimum of ten years of enrollment, ten rounds equated to 100 years in real time, a reasonable estimate for the length of time of farm ownership in Goshen County.…”

Subsidy Incidence in Privately Negotiated Spot Markets: Experimental Evidence

“…Yet, as described, these factors have significant impacts on market outcomes (Menkhaus, Phillips, and Bastian, 2003). Second, given the nature of privately negotiated transactions, data for empirical analyses are often not available (Nagler et al, 2013). Moreover, in naturally occurring markets, many factors interact with each other and confound empirical estimates of market impacts from subsidies.…”

“…Additionally, given previous findings of distinct impacts from trading institution and delivery method on market outcomes, competitive predictions regarding subsidy incidence likely do not hold in this market environment. However, the nature of private negotiation transactions causes a paucity of publicly available market data, limiting the potential for econometric analysis to isolate potential subsidy impacts (Nagler et al, 2013). Therefore, experimental methods offer opportunities to investigate how a subsidy affects market outcomes in privately negotiated spot markets beyond what theory may provide.…”

Economic Experiments as a Tool for Agricultural Policy Evaluation: Insights from the European CAP

“…Thus, controlled laboratory experiments with students were conducted to provide first insights into the impact of different trading rules on potential market outcomes. Nagler et al () conducted a lab experiment with both students and agricultural professionals to estimate the capitalization of subsidies into land rental prices with similar treatment effects observed between subject groups. Maart‐Noelck et al () study the impact of a price floor on investment behavior.…”