Subsidy Incidence in Factor Markets: An Experimental Approach
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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.