Effect of agricultural subsidies on the use of chemical fertilizer

Abstract

Agricultural subsidies lead to changes in the use of chemical fertilizer by farmers. Using data from a household survey conducted annually by the Rural Economy Research Center of the Ministry of Agriculture of China from 2014 to 2018, Control Function (CF) approach and Heteroskedasticity-based identification strategy were employed to analyze the impact of agricultural subsidies on chemical fertilizer use by rice farmers. After addressing the problem of endogeneity, we found that agricultural subsidies have a significantly negative impact on the use of chemical fertilizer. Precisely, every 100% increase in agricultural subsidies would result in an average decrease of 3.4% in chemical fertilizer use. In addition, results of heterogeneity analysis showed that agricultural subsidies had a stronger negative impact on fertilizer use as rice-planting experience increases. But the ability of rice-planting management and off-farm labor within household could reduce this negative impact. We also found that the effect of arable land productivity conservation subsidies policy was short-lived. Furthermore, based on the frame of structural equation model (SEM), the results of mediation analysis showed that agricultural machine and rice-planting area had partial mediation of 5.3% and 41%, respectively. It implied that agricultural subsidies reduced fertilizer use by promoting the adoption of agricultural techniques and expanding the planting area. In brief, agricultural subsidies had both technical effect and scale effect. But the mediating effect of household income was not significant. This study is intended to assist the concerned authority and agriculture sector to understand the positive role of agricultural subsidies in sustainable production, and provides some feasible policy proposals.

Keywords: Agricultural subsidies; Chemical fertilizer; China; Control function approach; Mediation analysis.