Storage Subsidies and Supply Response
Choi, E. Kwan
This paper investigates the supply response to a storage subsidy. From the ex post sales decision problem we derive the reservation price below which all risk averse farmers hold some inventory. While sales and storage decisions are made ex post, production decisions are made ex ante before the current market price is known. Storage subsidies are shown to encourage risk averse as well as risk neutral farmers to expand output. The analysis implies that storage subsidies should be incorporated in estimating supply response.