A Theory for Why Large Farms need Small Farms

John M. Crespi, Stéphan Marette
February 2020  [20-WP 599]

The political economy literature related to agricultural policy provides a number of conjectures corresponding to farm size, but provides no theoretical model of the political utility of small farms. Framed in the context of regulation, we demonstrate how large farms may use small farms to influence their regulatory burden. Producing in the presence of externalities, farms can be regulated to eliminate the damage. We compare a socially optimal regulation with the choice that would be taken by a large farm if it could influence the regulatory decision using the small farm as political cover. Compared to the socially optimal choice, there are cases where the large farm would choose regulation and reduced competition while in others would choose to fight the regulation to save its smaller rival. If the externality and the regulatory burden are very large, the large farm prefers more competition if that leads to less regulation. In this case, lobbying to “save small farms” is in the best interest of the large farm.

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