The Implications of Crop Minimum Support Price in the Presence of Myopic and Strategic Farmers

Abstract This paper examines the implications of credit-based MSPs in a setting that is more general than those examined in the research literature. Our setting entails a market comprising of two types of farmers (with heterogeneous production costs): “myopic” farmers (who make their crop selection and production decisions based on recently observed market prices) and “strategic farmers” (who make their decisions by taking all other farmers’ decisions into consideration). In addition, our setting involves two types of crops: “complementary crops” (e.g., cereals and legumes) or “substitutable crops” (e.g., different varieties of cereals). In our model, each type of farmer can select one type of crop to grow in response to a given MSP. By comparing the equilibrium outcomes, we obtain three new results. First, the strategic farmers “counteract” the decisions of the myopic farmers by producing less of the crop when its MSP is low. Second, when the market is dominated by myopic farmers, credit based MSP is more effective than the traditional procurement-based MSP. Third, a higher surplus can be attained by offering MSPs to complementary crops than substituable crops. Moreover, it is beneficial to offer a higher MSP to a crop that is cheaper to cultivate when the budget availability is high. However, when budget availability is low, it is advantageous to offer MSP to the crop that is costlier to cultivate. Also, we illustrate our analysis based on the Bhavantar-Bhugtan-Yojana policy, which is a variant of the credit-based MSP being implemented in India.