Subsidies and Crowding Out: A Double-Hurdle Model of Fertilizer Demand in Malawi

This article uses a double-hurdle model with panel data from Malawi to investigate how fertilizer subsidies affect farmer demand for commercial fertilizer. The article controls for potential endogeneity caused by the nonrandom targeting of fertilizer subsidy recipients. Results show that on average 1 additional kilogram of subsidized fertilizer crowds out 0.22 kg of commercial fertilizer, but crowding out ranges from 0.18 among the poorest farmers to 0.30 among relatively nonpoor farmers. This indicates that targeting fertilizer subsidies to the rural poor is likely to maximize the contribution of the subsidy program to total fertilizer use.