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Abstract
The present paper builds on the published literature on agricultural policy analysis
under costly and imperfect enforcement by introducing enforcement costs
and misrepresentation into the economic analysis of export subsidies. Specifically,
the present paper examines the economic causes of cheating on export subsidies
and the consequences of enforcement costs and misrepresentation for the
welfare effects and the transfer efficiency of this policy instrument. Policy design
and implementation is modelled as a sequential game between a government
that designs and enforces the policy and the recipients of the payments. Two
alternative policy implementation scenarios are considered. In the first scenario,
export subsidies are paid to private trading firms while in the second scenario
subsidies are paid directly to the producers of the subsidised commodity. Analytical
results show that the introduction of enforcement costs and cheating changes
the welfare effects of export subsidies and their efficiency in redistributing income
to producers. The analysis also shows that, contrary to what is traditionally
believed, the incidence of export subsidies depends on the group that is subsidised
to export the surplus quantity – the way the policy is implemented. The results
provide additional support for the contention that the economic consequences of
cheating are highly policy-specific. Finally, the analysis reveals that when the government
faces restrictions on either the volume or the value of export subsidies,
cheating reduces the distortionary effects of the policy on international markets.
This is true irrespective of whether subsidies are paid to trading firms or to
producers.