Urgent Yet Ineffective?

The Welfare Impacts of a Potato Price Support in Peru

Chris M. Boyd
October 30, 2021

[Click here for the latest version]

Abstract

Lacking price stabilization instruments like futures or exchange trades, most developing

countries rely on price support and trade policies to stabilize agricultural prices. The impacts of

price support policies have been addressed theoretically, within the expected utility theory

framework, and with simulations, usually at the country level. I contribute to this literature by

estimating the impact of a temporary potato price support policy in Peru on a different measure

of welfare: farmers households’ consumption. I exploit the geographical discontinuity of the

policy to assess its impacts using differences-in-differences. As expected, the overall impact of

the price support policy on consumption is not significant. Nonetheless, I find that net consumers,

farmers for whom potato represents a larger share of sales, and larger farmers are the ones

positively impacted by the price support.

Keywords: price support, price stabilization, price policy

JEL codes: Q18, Q11, I31, Q12

1
 1. Introduction

Governments still perform price interventions in developing countries. Governments of

developing countries that do not provide formal schemes to address the volatility of agricultural

prices (e.g. futures markets, exchange boards) use temporary price support policies to respond to

farmers’ discontent or unrest when (output) prices are very low or use them as common practice

under populistic regimes.1 By setting a price floor above the average market price, a price support

policies also reduce price volatility.

What is the impact of price support policies on farmers aimed to benefit from them? I estimate

the impact of a temporary potato price support policy on the welfare (measured as consumption)

of potato farmers’ households. The price support policy was implemented by the Peruvian

government in early 2018, aiming to benefit potato farmers, but only in certain regions of Peru. I

exploit the geographic discontinuity of the policy (only five regions were allowed to purchase

potato excess production at a price higher than the market price) to estimate the impact of the

price support using differences-in-differences. Moreover, I test the theoretical predictions of price

stabilization schemes, derived in the framework of the expected utility theory (Finkelshtain and

Chalfant 1991, 1997; Newbery and Stiglitz 1981; Schmitz, Shalit, and Turnovsky 1981).

Permanent (e.g., commodity exchanges, boards of trade) or one-time (e.g., urgent decrees

establishing output prices) price stabilization policies are based on an idea that has dominated

economic policy for a long time: people, especially agricultural producers, prefer price certainty

1
In contexts of imperfect or nonexistent insurance markets to cover price risk or other types of risk, farmers usually
self-insure themselves against risks using informal insurance schemes (Matul et al. 2013; Mobarak and Rosenzweig
2012).

2
to price uncertainty. In the framework of the expected utility theory, Sandmo's (1971) seminal

paper states that risk-averse (risk-loving) agents would produce less (more) under output price

uncertainty than under output price certainty. Similarly, Baron (1970) finds that the optimal level

of production is a nonincreasing function of the producer’s absolute risk aversion, and Schmitz

et al. (1981) find that the preference for price stability increases with relative risk aversion.

Moreover, they find that the producer “is more likely to prefer price instability in those products

that contribute a relatively small proportion to its total revenue” (Schmitz et al. 1981: 159).2

Finkelshtain and Chalfant (1991) analyze the problem for peasant households (i.e., producers and

consumers of the same crop) and find that net sellers of the home-produced normal (inferior)

good, who are also risk-averse farmers, will always produce less (more) than under price

certainty. Instead, if households are net buyers of the home-produced good (normal or inferior),

risk-averse peasants would overproduce under price uncertainty.3

Theoretically, the impact of price stabilization on welfare—in terms of surpluses—can be positive

or negative for consumers or producers. If the price of a crop is unstable, but the prices of all

farmer’s crops are, collectively, relatively stable, stabilizing the price of just one commodity

would increase the variability of the bundle of prices, thus increasing income variability and

making the producer worse off. Similarly, since the price of a commodity is correlated with

income, price variations serve to reduce the variability of real income, so price stabilization can

make consumers worse off (Newbery and Stiglitz 1981). Finkelshtain and Chalfant (1997) also

argue that the net consumer peasant benefits more from price instability because the possibilities

2
To illustrate this result, the authors give the example of Canadian producers who supported the Canadian Wheat
Board (i.e. to stabilize wheat prices), but said no to price stability of other (nonmajor) crops.
3
Note that all these studies analyze price stabilization while keeping the average price fixed. The policy analyzed in
this paper increased the mean price and reduced the volatility of prices.

3
of substitution of goods are greater; but as the share of production consumed decreases (i.e., as

the peasant behaves more like a pure producer), this consumption effect is less important, and

the willingness to pay to stabilize the output price increases.4 Nonetheless, Newbery and Stiglitz

(1981) argue that gainers of price stabilization could afford to over-compensate losers.

The welfare effects of price supports have been analyzed numerically (i.e., changes in consumer

and producer surpluses) (see e.g., Lichtenberg and Zilberman 1986), but not using household

microdata or focusing on the target population of the policy.5 Nonetheless, a few studies measure

the impacts of other price stabilization policies on welfare and they find mixed results. Studies of

agricultural commodity exchange boards (a formal price stabilization scheme), which contribute

to reducing price risk for producers and buyers by trading futures and options, find that their

presence in African countries represents a regressive policy (Jayne, Myers, and Nyoro 2008;

Mason and Myers 2013) or at least they do not have a sustained impact (Pierre, Pauw, and Magrini

2018).6

4 For the case of price stabilization in the production sector only, Finkelshtain and Chalfant (1997) show
that a sufficient condition for the peasant to prefer price stabilization is: 𝑟(1 − 2𝜌) + 2𝜌𝜂 > 0, where 𝑟 is the
Arrow-Pratt coefficient of risk aversion, 𝜌 is the ratio of consumption over production (of the only good
produced), and 𝜂 is the good income elasticity. Thus, the for a 𝜌<0.5, a risk-averse peasant would prefer
price stabilization in the production sector if the good is normal (Finkelshtain and Chalfant 1997: 1214).
Following this equation, for an inferior good and 𝜌 < 0.5, depending on the parameters, the peasant can
prefer or not price stability in the production sector only. Moreover, for an inferior good and 𝜌 > 0.5,
peasants would never prefer price stability in the production sector only. Note however that Finkelshtain
and Chalfant (1997) do not provide a rationality for the results with inferior goods.
5 The study of price support, however, has extended to other areas. For instance, the relationship between

market power and price supports (Kumse, Suzuki, and Sato 2020; Russo, Goodhue, and Sexton 2011).
6
Commodity exchanges have a long history in the United States, with the Chicago Board of Trade being the oldest
commodity exchange in operation (Rashid 2015). However, commodity exchanges have only appeared in developing
countries as part of the structural adjustment programs that were put in place in the 1980s and 1990s, in some countries
of Asia and Africa, but not in Latin America. The only two commodity exchanges in Latin America were created in
Argentina in 1909 and Brazil in 1985 (Rashid 2015).

4
Using observational data from Ethiopia, Bellemare, Barrett, and Just (2013) find that the

willingness to pay (WTP) for price stabilization is 18% of the average household income and that

this WTP increases as households get wealthier (Bellemare et al. 2013: 891). These results suggest

that the average household would benefit from price stabilization and that price stabilization is

regressive. McBride (2016) observes, however, that under different assumptions the relationship

between WTP for price stabilization and income is reversed, so food price stabilization can be a

progressive policy.

In a comprehensive review, Gouel (2014) finds that it is doubtful that price stabilization policies

in developing countries—done through trade and buffer stocks—could imply gains without the

country or its partners having to pay high costs. Moreover, Gouel (2014) argues that price

stabilization policies are at best second-best policies because they assume agents have difficulties

to coping with price shocks, which are not necessarily evidence of market failure. Instead, he

argues, the first-best policy would be to provide insurance, futures, or countercyclical transfers.

This paper contributes to the literature studying the impacts of price stabilization policies by

measuring the impact of a temporary stand-alone price support policy (non-accompanied by

trade policies) on the welfare of farmers aimed to benefit from the policy. Moreover, this paper

contributes to a rising literature testing the predictions of the expected utility theory (Boyd and

Bellemare 2020) by testing whether price stabilization has differential impacts on welfare for

different groups of peasants: net consumers vs. net producers, farmers for whom the target crop

represents a larger share of sales, and small vs. large farmers (Finkelshtain and Chalfant 1991,

1997; Newbery and Stiglitz 1981; Schmitz et al. 1981). This paper also contributes to policy-

making by providing evidence on the effectiveness of price support policies, still extensively used

5
in developing countries, the regressiveness or progressiveness of this kind of policy, and its

lasting effects on production.

Using differences-in-differences to compare potato farmers in adjacent areas where the price

support policy was implemented or not, I find that the presence of the policy did not have a

significant impact (local intention to treat) on the welfare of the average potato farmer.

Nonetheless, heterogeneous effects show that the price support policy increases consumption in

49% among net consumers, 21% among farmers with a large share of potato on farm sales, and

12% among large farmers.

The paper is organized as follows. Section 2 provides the details of the policy implementation.

Section 3 describes the data. Section 4 describes the empirical framework, detailing the estimation

strategy and the identification strategy. Section 5 presents and discusses the results. Section 6

concludes.

2. Background: The price support policy

Adverse climate conditions in 2017 generated an over-supply of potato during early 2018,

decreasing its price. Heavy rains delayed potato sowing and thus the potato harvest in northern

coastal regions of Peru. This delay generated a seasonal over-supply of potatoes at the beginning

of 2018 when the central and southern regions of Peru usually harvest potatoes. Farmers from the

central and southern regions of the country, organized in associations, took the main highways

to require the central government to intervene in the market and increase potato prices.

6
To respond to the farmers’ demands, after negotiations with potato farmers’ associations, and to

stop the highways blockage, on January 14th, 2018, the Peruvian government issued the urgent

decree DU 001-2018, which allowed the regional governments of only five regions of Peru

(Huánuco, Junín, Huancavelica, Apurímac, and Ayacucho) to purchase potato excess production

at a price higher than the market price (i.e., a minimum price), arguing that potato prices had

largely decreased for these regions. According to the Urgent Decree DU-001-2018, potato prices

decreased from an average of 1.05 Peruvian soles (PEN) per kilogram in 2017 to around 0.10 PEN

per kilogram in January 2018. This urgent decree established that each regional government

would determine the price at which potatoes would be purchased (output price) but all five

regional governments ended up establishing a price of 1 PEN per kilogram.7 To purchase the

excess potatoes, the central government provided each one of the regional governments with

funds of up to 1.5 million PEN (around 450 thousand USD) and established that this potato

purchasing scheme would be in place until February 29, 2018. Moreover, the decree established

that each regional government had to carry out a census of potato farmers (that included the

quantity of potato expected to be harvested), that only farmers in this census could sell (any

quantity of) their potatoes at the higher established price to each regional government, and that

these governments had to report the potato purchases to the Ministry of Agriculture.

Arguing that the price of potatoes kept dropping regardless of the intervention allowed by the

urgent decree DU 001-2018, on February 11th, 2018, the Peruvian government issued the urgent

decree DU 002-2018. This decree allowed the Ministry of Agriculture of Peru (MINAGRI) to buy

potato surpluses from farmers in the same five regions as the first decree. Purchases could be

7
During the policy implementation period the exchange rate was on average 1 USD = 3.236 PEN.

7
done until April 12th, 2018 (to farmers harvesting and giving their production to the MINAGRI

until March 21, 2018) for up to 50 million soles (around 15 million USD). This second decree

established purchases of no more than 7 000 kilograms per producer registered in the census, of

only good quality potatoes (healthy and whole white potatoes, of at least 70 grams each), at a

price of 1 PEN per kilogram, and only for potatoes delivered at a designated point (usually the

regional or province capital). Under both decrees, the purchased potatoes were given to social

and assistance public programs or non-lucrative organizations.

In sum, after an exogenous price shock, consequent social unrest, and lobby by farmers

associations, the Peruvian government introduced a temporary potato price support scheme in

five regions of Peru, which is not always the government’s response to demonstrations due to

prices dropping. Note that this policy stabilizes the potato price level—at a higher price level—,

but also eliminates the volatility of prices below the truncated price. Moreover, this policy

stabilized and increased prices only on the production side (since the price of potatoes for

consumers remained uncontrolled) and was available only for farmers with certain characteristics

(i.e., a given quality and quantity of potatoes), only in five regions of Peru.

3. Data

The main source of data used in the following analysis is the National Household Survey of Peru

(ENAHO), a unique survey that contains information on agricultural production and

consumption (not only monetary expenditures). Given that the policy under analysis affected

only potato farmers, I restrict the following analysis to potato farmers households, i.e., to

8
households that declared having planted at least some potatoes in the last twelve months.8

Moreover, given the subsample of potato farmers households in the ENAHO panel is very small

and is not necessarily representative of the universe of potato farmers, I use the cross-section

ENAHO survey waves from 2014 to 2018.

ENAHO surveys are gathered quarterly and then aggregated annually. Some of the survey

modules are available quarterly and others only annually. Income, expenditures, consumption,

and assets modules are available quarterly and yearly, but the agricultural module is available

only yearly. Thus, here I only use the data aggregated annually to include all available variables

and avoid seasonality data issues when assessing the impacts of the policy under study.

Moreover, I use survey month dummies as control variables.

The agricultural module of ENAHO does not include information about harvest timing. The

MINAGRI provides open-access information on the harvest calendars of the most important

crops in Peru. For the case of potatoes, MINAGRI reports the percentages of potatoes harvested

every month of the year, averaging harvests from 2009-2015, for every district of Peru (or at a

higher geographical aggregation level). Using this harvest calendar, I create a variable that

specifies the percentage of potato harvested between January and March (the months when the

policy was in place) for each district. This variable is the best proxy to the time of harvest and can

be interpreted as a probability of having harvested during the time the policy was in place.

8
There are thousands of varieties of potatoes in Peru, but the policy I study in this paper focused on white potatoes
(and hybrid varieties mixed with white potatoes), one of the most common varieties in the region of study.
Nonetheless, the data from ENAHO—neither other datasets—does not allow to distinguish between potato varieties.
Thus, an assumption of my estimations is that the prices and markets for other potato varieties did not change when
the potato price support policy was in place.

9
Note that ENAHO surveys neither contain information on who benefited from the policy under

study nor from similar policies in previous years. Due to Peruvian transparency laws for

government information, I could potentially get access to anonymized records of the potato

farmers census and the potato sales to regional governments and the MINAGRI when the price

support policy was in place. Nonetheless, it would be impossible to match this information with

ENAHO survey records.

A caveat about the data is that the production and consumption of potatoes are measured in

different time frames. ENAHO collects total production in the last twelve months and all

consumption in the last two weeks. Thus, total consumption is an annualized measure,

extrapolated from consumption in the past two weeks.9 Note that, like in other surveys, all

variables in ENAHO are self-reported.

4. Empirical Framework

4.1. Identification strategy

The potato price dropped during the first quarter of 2018 for all farmers harvesting at the time,

not only for the farmers in the five regions where the price support was implemented (the policy

area). Moreover, potatoes are produced along all the Peruvian Andes (see Map 1), which includes

the areas around the borders of the five regions where the policy was implemented. Thus, given

that farmers living close to the regional borders should have very similar characteristics,

9 The total annualized consumption variable I use is the official variable calculated by the Peruvian Statistics
Office (ENAHO).

10
comparing farmers living inside the policy area with their neighbors outside the policy area

(within a certain distance that guarantees they have similar characteristics) would allow

identifying the price support impacts on farmers’ welfare.

The treatment and comparison areas I define in this paper are based on the distance to the border

and administrative divisions, similar to Dell (2010). Specifically, I compare (i) provinces inside

the policy area (treatment provinces) to contiguous provinces outside the policy area (comparison

provinces), (ii) districts inside the policy area (treatment districts) to contiguous districts outside

the policy area (comparison districts), (iii) a 20-kilometer buffer area, inside and outside, from the

policy area border, and (iv) a 30-kilometers buffer area, inside and outside, from the border of the

policy area.10 (See Maps 2-5).

The implementation of the price support was strict in ensuring that only farmers living in the

policy area benefited from higher prices. To sell their potatoes at the higher established price,

farmers had to be registered in the potato farmer census (carried out in January only in the five

regions of the policy area) and had to show their national identity document to verify they lived

in the region where they were enumerated, besides making sure their potatoes fulfilled the

quality requirements and the total quantity was below 7 tons.11

10
Administratively, Peru is divided into 25 regions. Regions are divided into provinces and provinces are divided into
districts. I compare provinces instead of districts because the ENAHO is representative only until the province level,
i.e., it is not representative at the district level.
11
When the first decree was in place farmers could sell an uncapped quantity of potatoes, without quality requirements,
at the higher price. Under the second decree, to sell at the higher price, farmers had to fulfill the potato quality and
quantity requirements. Nonetheless, only a few farmers likely benefited from the price support under the first decree
because the total budget under this decree was only 1.5 million USD, while the budget under the second decree was
15 million USD. Thus, very likely, most farmers benefiting from the price support had to comply with the potato
quality requirements and the 7 tons selling cap.

11
For farmers outside the policy area to benefit from the price support, they should have made

themselves part of the census and changed their national identity documents in a short period,

which seems unrealistic to happen. Another possibility is that farmers outside the policy area

colluded with farmers within the policy area to sell their potatoes at a higher price, but this

needed the latter farmer to have registered in the census, a priori, an expected quantity harvested

larger than his actual production, and that the total production of potato (fulfilling the quality

requirements) was below 7 tons, which could have needed good coordination from the beginning

of the policy period. Even if some farmers in comparison areas benefited from the price support,

this would bias the estimates downwards, underestimating the impacts of the policy, so my

estimates would constitute at least a lower bound estimate of the price support policy.

Table 1 shows that treatment (inside) and comparison (outside) groups are statistically similar in

the relevant control variables, for all four study areas defined above.12 There are no statistically

significant differences in altitude, the probability of harvesting during the policy period, number

of crops, importance of potato with respect to the farm production value, percent of potato sold

to the market, or number of household members.13 The quantity of potato production and the

ratio of consumption to production of potato are significantly different only for treatment and

comparison groups in border provinces.

12
I calculate the difference of means with OLS regressions including year dummies, sample weights, and standard
errors clustered at the district level.
13
Altitude is a very important variable since at higher altitudes not only potatoes are sowed more frequently, but
altitude can be a mechanism to cope with price risk. Potato farmers at higher altitudes can choose to delay for a few
weeks, or even months, their potato sales to the market—until prices increase—since they can naturally storage
potatoes because of the cold temperatures.

12
 Table 1. Summary Statistics
Border provinces Border districts < 20 km from border < 30 km from border
Control variables Difference Difference Difference Difference
Inside Outside Inside Outside Inside Outside Inside Outside
S.E. S.E. S.E. S.E.
Altitude 3,351.13 3,423.63 (71.192) 3,354.11 3,399.74 (118.731) 3,439.58 3,428.92 (100.165) 3,401.97 3,433.78 (89.552)
Probability of harvest during 6.87 14.70 (4.972) 23.64 26.49 (8.278) 15.77 20.26 (6.582) 10.57 16.32 (5.363)
policy period
Number of crops grown by 5.28 6.17 (0.597) 4.29 5.50 (0.807) 4.82 5.89 (0.853) 5.28 6.25 (0.775)
the household
Percentage of potato 0.57 0.55 (0.050) 0.68 0.61 (0.071) 0.66 0.59 (0.073) 0.64 0.58 (0.059)
production value in total
production value
Percent of potato production 0.32 0.27 (0.049) 0.38 0.32 (0.079) 0.34 0.31 (0.080) 0.33 0.28 (0.062)
sold to the market
Log of kg. of potato 7.86 7.35 (0.197)** 8.11 7.55 (0.294)* 7.83 7.55 (0.262) 7.84 7.46 (0.218)*
production
Log of ratio consumption/ 0.35 0.48 (0.052)** 0.32 0.42 (0.072) 0.38 0.41 (0.062) 0.38 0.44 (0.056)
production of potato
Number of household 3.89 3.83 (0.106) 4.01 3.75 (0.230) 4.02 3.77 (0.245) 4.01 3.78 (0.171)
members
Distance to the capital 0.145 0.183 (0.031) 0.168 0.211 (0.049) 0.177 0.199 (0.044) 0.165 0.179 (0.037)
Household members in off-
farm labor 0.592 0.619 (0.064) 0.674 0.581 (0.112) 0.737 0.621 (0.119) 0.741 0.614 (0.086)
Household members in small
retail 0.028 0.018 (0.008) 0.020 0.025 (0.011) 0.027 0.022 (0.011) 0.031 0.019 (0.010)
Household members doing
housework as main activity 0.040 0.026 (0.013) 0.064 0.028 (0.029) 0.046 0.024 (0.027) 0.040 0.023 (0.019)
Members studying as main
activity 0.481 0.400 (0.044)* 0.498 0.358 (0.057)** 0.408 0.361 (0.053) 0.424 0.377 (0.045)
Log of agricultural
production total cost 7.964 7.597 (0.147)** 8.047 7.705 (0.215) 7.902 7.751 (0.168) 7.914 7.701 (0.151)
Number of big animals 13.857 16.497 (1.877) 16.465 16.813 (3.310) 18.507 17.837 (3.115) 19.259 17.016 (2.854)
Number of small animals 18.758 17.063 (2.481) 14.207 13.491 (2.992) 15.257 15.334 (3.571) 17.281 18.312 (3.505)

Observations 1,928 1,088 563 608 469 743 767 959

Notes: Inside and Outside values calculated with simple mean differences and sample weights. Differences are calculated with OLS regressions including control dummies
for years 2016, 2017, and 2018, and clustered standard errors at the district level (shown in parentheses). All variables come from ENAHO annual cross-section surveys (2015-
2018), except for the probability of harvest during the policy period (from MINAGRI). *** p<0.01, ** p<0.05, * p<0.1.

13
 4.2. Estimation strategy

I assess the impact of the temporary price stabilization policy on farmers’ welfare using

differences-in-differences (DiD). With ENAHO data I cannot observe who benefited from the

price support policy at the individual level. Thus, I estimate the intention to treat (ITT), i.e., the

impact of the presence of the policy on the total population of potato farmers included in the

ENAHO cross-section surveys from 2014 to 2018. Moreover, I estimate the ITT within the area of

study (border provinces, border districts, 20-kilometer or 30-kilometer buffers from the policy

area borders), i.e., I estimate the ITT in the locality of the border of the policy area.

The main assumption of the DiD approach is the presence of parallel trends in the counterfactual

case where the price support policy was not introduced. Although this assumption is untestable,

I use an event-study design to test the presence of parallel trends before the introduction of the

price support, i.e., from 2014 to 2017. As it is customary in event studies, I use 2017, one period

before the policy introduction, as a baseline. Moreover, I include in the event-study a year post-

policy implementation (2019) to assess whether the impacts of the policy remain over time,

although these estimates are not necessarily causal.

The event-study equation I estimate is:

𝑦𝑖𝑡 = 𝛼1 + 𝛽−𝑘 (𝐷𝑖𝑡−𝑘 ) + ⋯ + 𝛽0 (𝐷𝑖0 ) + ⋯ + 𝛽𝑘 (𝐷𝑖𝑡+𝑘 ) + 𝜇𝑅 + 𝜆𝑡 + 𝑋𝑖𝑡 𝛾1 + 𝜀1𝑖𝑡 (1)

where 𝑦𝑖𝑡 is consumption for household 𝑖 in year 𝑡; 𝛼1 is a constant; 𝐷𝑖𝑡 is a dummy indicating

the number of periods from or until the event year (or time to treatment), such as 𝑡 = 0 is 2018,

the year the price support policy was in place; 𝜇𝑅 are region fixed effects; 𝜆𝑡 are year fixed effects;

𝑋𝑖𝑡 is a vector of three control variables: altitude, distance to the closest province capital, and

14
probability of harvesting potatoes in the district of residence between January and March; 𝜀1𝑖𝑡 is

the error term.

I also use equation (1) to assess the impacts of the policy on different subsamples and thus test

some of the expected utility theory predictions regarding welfare under price stabilization. First,

following Finkelshtain and Chalfant (1997), risk-averse farmers with a ratio of

consumption/production of the farm-produced inferior good (e.g. potato) larger than 0.5 (some

net producers and all net consumers) would always lose from price stabilization in the production

sector only. Thus, I estimate equation (1) for subsamples of net producers and net consumers

(with different consumption/production ratios) to test Finkelshtain and Chalfant's (1997)

predictions. Second, Schmitz et al. (1981) find that for more than one crop, farmers would prefer

price-stabilization only of the output price of their most important crops. Thus, I estimate

equation (1) for the subsample of farmers with larger shares (75th percentile or more) of potato in

total farm sales to assess whether farmers for whom potato is more important benefited more

from the price support. Third, to test whether this is a progressive or regressive policy, I estimate

equation (1) for the subsample of larger farmers (75th percentile or more of potato production).

5. Results

The local ITT of the price support policy is not significant. Table 2 shows that when defining

treatment and comparison groups as households in border provinces or the 30-kilometer buffer

(the specifications with the most observations), the estimated impacts of the policy in 2018 (the

year of the policy) are never significant (at the 5% or 10% significance level), with or without

controls, and the pre-intervention parallel trends hold. For the treatment and comparison groups

15
defined as households in border districts and in the 20-kilometer buffer, I do not find significant

impacts of the policy in 2018 either, but there is some evidence of non-parallel pre-intervention

trends. In 2019, the first year after the price support policy ended, households in treatment

districts are significantly worse off than those in comparison districts, but we cannot necessarily

call this a consequence of the price support policy turning off. Given the diversity of farmers in

the sample, in terms of their consumption/production ratios or the importance of potatoes, it is

not surprising that the overall impact of the price support policy was not significant.

For the subsample of net producers with a ratio of consumption to production smaller than 0.5, I

find no significant impacts of the policy, while the pre-intervention parallel trends hold (see Table

A2). On the one hand, theoretically, according to Finkelshtain and Chalfant (1997), this subsample

of farmers would benefit from price stability if the good is normal. Nonetheless, potato is an

inferior good among the households in the sample.14 Following Finkelshtain and Chalfant (1997),

farmers with a ratio of consumption to production of an inferior good smaller than 0.5 might

benefit or not from price stabilization depending on the magnitude of the ratio of consumption

to production, the income-elasticity, and the coefficient of risk aversion.

On the other hand, following Finkelshtain and Chalfant (1997), all farmers producing an inferior

good with a ratio of consumption to production larger than 0.5, i.e., including all net consumers,

would never benefit prom price instability. However, for the subsample of net consumers, i.e.,

farmers with a consumption to production ratio larger than 1 (around 20% of the total sample), I

14
Table A1, in the appendix, shows that potato is an inferior good for the households in the sample. Using the four
income variables calculated in ENAHO, it is observed that the income-elasticity of potato is between -0.16 (for
monetary income) and -0.30 (for total income). Moreover, assuming the sales price received by the household is equal
to the price at which they would purchase or self-consume potatoes (i.e., the consumer price), there is no evidence of
a positive price-elasticity, so potato cannot be considered as a Giffen good for the households in the study.

16
find that the local ITT of the price support policy is positive, while the parallel trends hold (see

Table 3). The introduction of the price support policy increases total consumption in around 49%

among net consumers. Although this result contradicts the prediction of Finkelshtain and

Chalfant (1997), the rationality behind it can be that since the policy introduced a price

stabilization scheme only in the production sector, net consumers were already benefiting (more

than net producers) from price instability in the consumption sector, so an increased and stable

income from sales would benefit them even more. Following Finkelshtain and Chalfant's (1997)

assumptions, it is also possible that net consumers were risk-loving agents, which I cannot test

with the data.

17
 Table 2. Differences-in-Differences (2014-2019): Impact of price stabilization on welfare
Log. Household Total Consumption Log. Household Total Consumption
Border Border < 20 km < 30 km Border Border < 20 km < 30 km
Area of study: provinces districts from border from border provinces districts from border from border
(1) (2) (3) (4) (5) (6) (7) (8)
Year 2019 (t+1) * Price -0.077 -0.260** -0.213 -0.159 -0.064 -0.218* -0.168 -0.117
Stabilization Area (0.074) (0.116) (0.136) (0.108) (0.074) (0.121) (0.133) (0.105)
Year 2018 (t=0) * Price -0.057 -0.064 -0.053 -0.007 -0.066 -0.051 -0.050 -0.010
Stabilization Area (0.083) (0.134) (0.115) (0.101) (0.086) (0.123) (0.114) (0.102)
Year 2014-2016 (t<=-1) * Price -0.057 -0.181* -0.174* -0.114 -0.054 -0.185** -0.160 -0.112
Stabilization Area (0.069) (0.097) (0.103) (0.086) (0.068) (0.091) (0.100) (0.084)
Controls No No No No Yes Yes Yes Yes

R-squared 0.033 0.088 0.103 0.081 0.072 0.148 0.134 0.112

Observations 3,675 1,446 1,495 2,114 3,547 1,415 1,483 2,078
Notes: Baseline year is 2017. Clustered standard errors at the district level in parentheses. All regressions include fixed effects at the region level
and ENAHO household sample weights. Total consumption comes from ENAHO annual cross-section surveys (2014-2019) and it is spatially
deflated. Price stabilization area is the treatment variable, and it is equal to 1 if the household is in one of the five treatment regions (Huánuco,
Junín, Huancavelica, Apurímac, and Ayacucho), and 0 otherwise, within the area of study. Control variables include altitude, probability of
harvesting potatoes in the district of residence during the period of the policy, and distance to the province capital.
*** p<0.01, ** p<0.05, * p<0.1

18
 Table 3. Differences-in-Differences (2015-2018): Impact of price stabilization on welfare for net consumers
Log. Household Total Consumption Log. Household Total Consumption
Border Border < 20 km < 30 km Border Border < 20 km < 30 km
Area of study: provinces districts from border from border provinces districts from border from border
(1) (2) (3) (4) (5) (6) (7) (8)
Year 2019 (t+1) * Price -0.205 0.133 0.047 0.067 -0.232 0.251 0.386 0.099
Stabilization Area (0.251) (0.392) (0.377) (0.272) (0.238) (0.350) (0.409) (0.281)
Year 2018 (t=0) * Price 0.270 0.538* 0.296 0.401** 0.307 0.628** 0.555 0.399*
Stabilization Area (0.188) (0.286) (0.263) (0.202) (0.200) (0.293) (0.406) (0.224)
Year 2014-2016 (t<=-1) * Price -0.223 -0.217 -0.205 -0.244 -0.270 -0.202 -0.114 -0.318
Stabilization Area (0.165) (0.286) (0.267) (0.184) (0.199) (0.361) (0.410) (0.209)
Controls No No No No Yes Yes Yes Yes

R-squared 0.110 0.239 0.171 0.147 0.206 0.434 0.337 0.298

Observations 319 113 113 177 283 106 113 171
Notes: Baseline year is 2017. Clustered standard errors at the district level in parentheses. All regressions include fixed effects at the region level
and ENAHO household sample weights. Total consumption comes from ENAHO annual cross-section surveys (2014-2019) and it is spatially
deflated. Price stabilization area is the treatment variable, and it is equal to 1 if the household is in one of the five treatment regions (Huánuco,
Junín, Huancavelica, Apurímac, and Ayacucho), and 0 otherwise, within the area of study. Control variables include altitude, probability of
harvesting potatoes in the district of residence during the period of the policy, and distance to the province capital.
*** p<0.01, ** p<0.05, * p<0.1

19
For the subsample of farmers for whom potato was an important crop, i.e., in the 75th percentile

or more of the distribution of the share of potato to total farm sales (greater or equal than 41.67%),

I find that the price support increased their total consumption in at least 21.5% (see Table 4).

Moreover, for this subsample the pre-intervention parallel trends hold, and in the post-

intervention period (2019) the differences between households in the treatment and comparison

areas are not significant. This result confirms the prediction by Schmitz et al. (1981) that farmers

with more than one crop would prefer price stabilization for the most important crop, and thus

would benefit from the stabilization of the price of their most important crop.

For the subsample of larger farmers, i.e., in the 75th percentile or more of potato production, I find

the price support policy increases total consumption in at least 12% (see Table 5). The pre-

intervention parallel trends also hold in this case. Given that larger potato farmers also have

larger incomes, the price support policy can be considered a regressive policy. Nonetheless, the

results for the post-policy period (2019) show that it is possible that the larger potato farmers in

the treatment area were worse off than the large potato farmers in the comparison area.

20
 Table 4. Differences-in-Differences (2015-2019): Impact of price stabilization on welfare of producers for whom potato sales are more important
Log. Household Total Consumption Log. Household Total Consumption
Border Border < 20 km < 30 km Border Border < 20 km < 30 km
Area of study: provinces districts from border from border provinces districts from border from border
(1) (2) (3) (4) (5) (6) (7) (8)
Year 2019 (t+1) * Price -0.116 -0.203 -0.158 -0.131 -0.080 -0.078 -0.039 -0.062
Stabilization Area (0.101) (0.138) (0.175) (0.143) (0.110) (0.142) (0.166) (0.151)
Year 2018 (t=0) * Price 0.114 0.108 0.187 0.229** 0.131 0.195* 0.232 0.237**
Stabilization Area (0.095) (0.124) (0.150) (0.106) (0.087) (0.111) (0.153) (0.104)
Year 2014-2016 (t<=-1) * Price 0.072 -0.015 0.029 0.035 0.072 0.011 0.036 0.041
Stabilization Area (0.068) (0.068) (0.088) (0.079) (0.068) (0.058) (0.086) (0.075)
Controls No No No No Yes Yes Yes Yes

R-squared 0.071 0.153 0.168 0.140 0.128 0.197 0.197 0.174

Observations 1,194 591 541 736 1,162 582 536 722
Notes: Baseline year is 2017. Clustered standard errors at the district level in parentheses. All regressions include fixed effects at the region level
and ENAHO household sample weights. Total consumption comes from ENAHO annual cross-section surveys (2014-2019) and it is spatially
deflated. Price stabilization area is the treatment variable, and it is equal to 1 if the household is in one of the five treatment regions (Huánuco,
Junín, Huancavelica, Apurímac, and Ayacucho), and 0 otherwise, within the area of study. Control variables include altitude, probability of
harvesting potatoes in the district of residence during the period of the policy, and distance to the province capital.
*** p<0.01, ** p<0.05, * p<0.1

21
 Table 5. Differences-in-Differences (2015-2018): Impact of price stabilization on welfare for larger producers
Log. Household Total Consumption Log. Household Total Consumption
Border Border < 20 km < 30 km Border Border < 20 km < 30 km
Area of study: provinces districts from border from border provinces districts from border from border
(1) (2) (3) (4) (5) (6) (7) (8)
Year 2019 (t+1) * Price -0.101 -0.191 -0.234 -0.236* -0.083 -0.046 -0.093 -0.128
Stabilization Area (0.092) (0.116) (0.171) (0.135) (0.098) (0.132) (0.165) (0.145)
Year 2018 (t=0) * Price 0.096 0.066 0.127* 0.123* 0.036 0.145* 0.163** 0.119*
Stabilization Area (0.080) (0.079) (0.065) (0.069) (0.068) (0.074) (0.078) (0.070)
Year 2014-2016 (t=-2) * Price 0.097 0.044 0.030 0.065 0.071 0.029 0.016 0.052
Stabilization Area (0.085) (0.100) (0.139) (0.116) (0.094) (0.103) (0.134) (0.118)
Controls No No No No Yes Yes Yes Yes

R-squared 0.110 0.214 0.261 0.221 0.175 0.266 0.314 0.258

Observations 1,091 516 455 612 1,075 506 447 600
Notes: Baseline year is 2017. Clustered standard errors at the district level in parentheses. All regressions include fixed effects at the region level
and ENAHO household sample weights. Total consumption comes from ENAHO annual cross-section surveys (2014-2019) and it is spatially
deflated. Price stabilization area is the treatment variable, and it is equal to 1 if the household is in one of the five treatment regions (Huánuco,
Junín, Huancavelica, Apurímac, and Ayacucho), and 0 otherwise, within the area of study. Control variables include altitude, probability of
harvesting potatoes in the district of residence during the period of the policy, and distance to the province capital.
*** p<0.01, ** p<0.05, * p<0.1

22
 6. Conclusion

Either permanent (e.g., commodity exchanges, boards of trade) or one-time (e.g., urgent decrees

establishing output prices) price stabilization policies are based on an idea that has dominated

economic policy for a long time: people prefer certainty over uncertainty. Even though this idea

seems reasonable, some theoretical studies have proposed that complete price stabilization (i.e.,

eliminating all price uncertainty) may not always be preferred, even within the framework of the

expected utility theory (Finkelshtain and Chalfant 1991, 1997). This is the case of some peasant

households that consume and produce the same commodity. In theory, if the good is normal,

peasants can benefit from price stabilization on the production side, but also from price instability

on the consumption side due to the possibility of substituting consumed goods.

The theoretical literature on price stabilization, especially within the framework of the expected

utility theory, is wide but it has not been as extensively tested (Boyd and Bellemare 2020). At the

same time, one-time price support policies have been used for a long time by governments

without institutionalized schemes of price stabilization to assess the low levels and volatility of

agricultural prices. In this paper, I assessed the effects of a one-time price support policy in the

production sector on the welfare of Peruvian potato farmers. To the best of my knowledge, no

previous study has assessed the farmers’ welfare impacts of one-time price support policies in

developing countries. Moreover, the study of price stabilization is especially relevant for Peru

and other countries where (i) there is not a public price stabilization institution—like the food

23
reserve agencies in Africa—for any crop; and where (ii) potatoes are consumed and produced

extensively.15

My results show overall non-significant impacts of the presence of this price support policy—

which increased the price and reduced its volatility only in the production sector—on the welfare

of potato farmers—aimed to benefit from this policy— at least for the farmers living in the borders

of the treatment regions and their contiguous counterpart in regions without this policy.

Moreover, heterogeneous effects show that net consumers benefited more from the policy,

contrary to what was expected from Finkelshtain and Chalfant's (1997) prediction, in the

framework of the expected utility theory. Farmers for whom potato was an important crop (in

terms of farm sales) also benefited more from the price support policy, as was predicted by

Schmitz et al. (1981). Moreover, I found larger positive impacts of the price support policy on

welfare for larger farmers, suggesting that this “fire-extinguishing” policy (Swinnen 2018) was

also a regressive one.

Moreover, the question of the cost-effectiveness of temporary price stabilization policies remains.

The Peruvian government spent more than 15 million USD to implement the policy under study,

which ended up benefiting only some farmers. Note that even the larger farmers who benefited

from this policy were not big or industrialized. Thus, it is necessary to study whether this kind of

scheme is preferable to market-driven initiatives to stabilize prices for farmers that would prefer

price certainty (e.g., price insurance, futures markets).

15
According to the Ministry of Agriculture of Peru, per capita consumption of potatoes is above 90 kg per year, and
more than 700 000 rural households produce potatoes –around 35% of rural households-, in 19 of the 25 regions of
Peru.

24
References

Baron, David P. 1970. “Price Uncertainty, Utility, and Industry Equilibrium in Pure Competition.”

International Economic Review 11(3):463–80.

Bellemare, Marc F., Christopher B. Barrett, and David R. Just. 2013. “The Welfare Impacts of

Commodity Price Volatility: Evidence from Rural Ethiopia.” American Journal of Agricultural

Economics 95(4):877–99.

Boyd, Chris M. and Marc F. Bellemare. 2020. “The Microeconomics of Agricultural Price Risk.”

Annual Review of Resource Economics (Forthcoming).

Dell, Melissa. 2010. “The Persistent Effects of Peru’s Mining Mita.” Econometrica 78(6):1863–1903.

Finkelshtain, Israel and J. A. Chalfant. 1997. “Commodity Price Stabilization in a Peasant

Economy.” American Journal of Agricultural Economics 79(4):1208–17.

Finkelshtain, Israel and James A. Chalfant. 1991. “Marketed Surplus under Risk: Do Peasants

Agree with Sandmo?” American Journal of Agricultural Economics 73(3):557–67.

Gouel, Christophe. 2014. “Food Price Volatility and Domestic Stabilization Policies Food Price

Volatility and Domestic Stabilization Policies in Developing Countries.” Pp. 261–306 in The

Economics of Food Price Volatility, edited by J.-P. Chavas, D. Hummels, and B. D. Wright.

National Bureau of Economic Research.

Jayne, T. S., Robert J. Myers, and James Nyoro. 2008. “The Effects of NCPB Marketing Policies on

Maize Market Prices in Kenya.” Agricultural Economics 38:313–25.

Kumse, Kaittisak, Nobuhiro Suzuki, and Takeshi Sato. 2020. “Does Oligopsony Power Matter in

Price Support Policy Design? Empirical Evidence from the Thai Jasmine Rice Market.”

Agricultural Economics (United Kingdom) 51(3):373–85.

Lichtenberg, Erik and David Zilberman. 1986. “The Welfare Economics of Price Support in U.S.

25
 Agriculture.Pdf.” The American Economic Review 76(5):1135–41.

Mason, Nicole M. and Robert J. Myers. 2013. “The Effects of the Food Reserve Agency on Maize

Market Prices in Zambia.” Agricultural Economics 44:203–16.

McBride, Linden. 2016. “A Comment on ‘The Welfare Impacts of Commodity Price Volatility:

Evidence from Rural Ethiopia.’” American Journal of Agricultural Economics 98(2):670–75.

Newbery, David M. and Joseph E. Stiglitz. 1981. The Theory of Commodity Price Stabilization: A

Study in the Economics of Risk. Oxford, New York: Clarendon Press, Oxford University Press.

Pierre, Guillaume, Karl Pauw, and Emiliano Magrini. 2018. “The Effect of the National Food

Reserve Agency on Maize Market Prices in Tanzania.” Review of Development Economics

22(2):540–57.

Rashid, Shahidur. 2015. “Commodity Exchanges and Market Development: What Have We

Learned?” Pp. 1–33 in International Conference of Agricultural Economists. International

Association of Agricultural Economists.

Russo, Carlo, Rachael E. Goodhue, and Richard J. Sexton. 2011. “Agricultural Support Policies in

Imperfectly Competitive Markets: Why Market Power Matters in Policy Design.” American

Journal of Agricultural Economics 93(5):1328–40.

Sandmo, Agnar. 1971. “On the Theory of the Competitive Firm Under Price Uncertainty.”

American Economic Review 61(1):65–73.

Schmitz, Andrew, Haim Shalit, and Stephen J. Turnovsky. 1981. “Producer Welfare and the

Preference for Price Stability.” American Journal of Agricultural Economics 63(1):157–60.

Swinnen, Johan. 2018. The Political Economy of Agricultural and Food Policies. New York: Palgrave

Macmillan.

26
 Appendix
Map 1. Peru: Treatment regions and households of potato farmers

27
Map 2. Treatment and comparison provinces

28
Map 3. Treatment and comparison districts

29
Map 4. Treatment and comparison areas in a 20 kilometers buffer

30
Map 5. Treatment and comparison areas in a 30 kilometers buffer

31
 Table A1. Income-Elasticity and Price-Elasticity of Potato
Log. Household Potato Consumption (quantity in Kg.)
Income- Income- Income- Income- Price-
Elasticity Elasticity Elasticity Elasticity Elasticity
(1) (2) (3) (4) (5)
Log. Household Gross Monetary -0.157***
Income (0.044)
Log. Household Net Monetary -0.157***
Income (0.043)
Log. Household Total Gross Income -0.304***
(0.066)
Log. Household Total Net Income -0.306***
(0.066)
Log. sales price of potato -0.123
(0.086)
R-squared 0.349 0.348 0.355 0.354 0.341
Clusters 292 292 292 292 292
Observations 3,046 3,046 3,046 3,046 3,045
Notes: Clustered standard errors at the district level in parentheses. Income and consumption
variables come from ENAHO annual cross-section surveys (2015-2018). All regressions include
controls in Table 1, year dummies, month of survey dummies, region (department) dummies, and
sample weights.
*** p<0.01, ** p<0.05, * p<0.1

32
 Table A2. Differences-in-Differences (2015-2018): Impact of price stabilization on welfare for net producers (𝜌 < 0.5)
Log. Household Total Consumption Log. Household Total Consumption
Border Border < 20 km < 30 km Border Border < 20 km < 30 km
Area of study: provinces districts from border from border provinces districts from border from border
(1) (2) (3) (4) (5) (6) (7) (8)
Year 2019 (t+1) * Price -0.097 -0.303** -0.246 -0.185 -0.053 -0.190 -0.182 -0.116
Stabilization Area (0.085) (0.130) (0.160) (0.128) (0.082) (0.124) (0.156) (0.125)
Year 2018 (t=0) * Price -0.110 -0.126 -0.076 -0.047 -0.084 -0.060 -0.028 -0.022
Stabilization Area (0.087) (0.125) (0.113) (0.100) (0.091) (0.120) (0.113) (0.103)
Year 2014-2016 (t<=-1) * Price -0.027 -0.147 -0.137 -0.041 -0.010 -0.123 -0.112 -0.032
Stabilization Area (0.072) (0.102) (0.115) (0.094) (0.074) (0.098) (0.110) (0.091)
Controls No No No No Yes Yes Yes Yes

R-squared 2,697 1,085 1,109 1,522 2,629 1,068 1,098 1,498

Observations 0.045 0.104 0.127 0.098 0.099 0.161 0.152 0.132
Notes: Baseline year is 2017. Clustered standard errors at the district level in parentheses. All regressions include fixed effects at the region level
and ENAHO household sample weights. Total consumption comes from ENAHO annual cross-section surveys (2014-2019) and it is spatially
deflated. Price stabilization area is the treatment variable, and it is equal to 1 if the household is in one of the five treatment regions (Huánuco,
Junín, Huancavelica, Apurímac, and Ayacucho), and 0 otherwise, within the area of study. Control variables include altitude, probability of
harvesting potatoes in the district of residence during the period of the policy, and distance to the province capital.
*** p<0.01, ** p<0.05, * p<0.1

33
 Figure A1. Historical Potato Consumer Prices

Figure A2. Daily Potato Consumer Prices Evolution during the price-support was in place
(January-March 2018)

34