On the gains of committing to inefficiency: Corruption, deforestation and low land productivity in Latin America

We present a new explanation and empirical evidence showing that rural subsidies to large farmers tend to be associated with low land productivity and excessive deforestation. We develop a lobbying model where wealthy farmers trade bribes or political contributions to government politicians in exchange for subsidies; farmers are able to tilt the terms of the bargaining game with policy makers in their favor by pre-committing to an inefficient choice of semi-fixed inputs. Government proneness to accept political contributions or bribes and its willingness to provide subsidies cause farmers to adopt inefficient modes of production as a mechanism to capture such subsidies. Our predictions are consistent with stylized facts on land use in Latin America, and suggest that subsidy schemes have been counterproductive—distorting and constraining development, and triggering excessive depletion of natural resources. We validate some of the predictions of the model through econometric analyses using a new data set for nine countries in Latin America.