Abstract
Despite the common application of agricultural subsidies to develop agriculture and increase its productivity, there is still ambiguity concerning the effectiveness of this measure based on empirical evidence. Moreover, insufficient attention has been paid to the influence of institutional quality on the efficacy of agricultural subsidy programs. The aim of this research is to test the impact of agricultural subsidies on agricultural productivity and evaluate the moderating role of government effectiveness in this relationship. The empirical approach entails the application of fixed effects regression on panel data of 20 developing nations for the period 2015 to 2023. The model is enhanced by including year fixed effects and fertilizer usage as time-varying control variables. Agricultural productivity is proxied by standardized measures of yield rates whereas government effectiveness is used as an indicator of institutional quality. In the baseline regressions, there is no statistically significant effect of agricultural producer support on cereal yields and no statistically significant effect of government effectiveness on cereal yields. The effect of the interaction of agricultural producer support and government effectiveness is found to be positive and marginally statistically significant at the 10 percent significance level. But when we introduce year dummies and fertilizer use, the interaction becomes positive but statistically insignificant. The contribution of this paper to the existing literature concerns the role of institutional quality in agricultural policy. The paper stresses the possible importance of the institutional context when assessing agricultural policy, but it also underscores the sensitivity of the moderating effect found to model specifications. Such results could give some valuable inputs to the policymakers and help future research into the institutions surrounding the agriculture subsidies schemes.