Subsidy Incidence and Inertia in Farmland Rental Markets: Estimates from a Dynamic Panel
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Recent econometric studies indicate that the effect of government farm subsidies on farmland
rental rates may be smaller than once thought. This literature has corrected for bias due
to expectation error in measured subsidy payments. We suggest two additional sources of
bias—inertia and tenancy arrangements—that may explain the discrepancy between theoretical
predictions and empirical estimates of subsidy incidence. We identify a model that accounts for
these issues, employ panel data from Kansas to estimate it, and find that an additional dollar per
acre of government subsidy increases rental rates by $0.12 per acre in the short run and $0.37 per
acre in the long run.