Optimal Fertilizer Subsidy Policy Amid Price Volatility in Rwanda

This National Bureau of Economic Research working paper by Wyatt Brooks and Kevin Donovan analyzes time-consistent optimal industrial policy for undiversified owner-operators facing financial frictions. The study focuses on fertilizer subsidies, a critical policy instrument in developing nations, particularly during periods of price volatility. Leveraging household-level data from 444 rural Rwandan villages between 2020 and 2024, the authors examine the economic impact of fertilizer prices doubling following Russia’s invasion of Ukraine. The research finds that villages with higher fertilizer intensity experienced a 30 percent reduction in fertilizer spending, a 21 percent decline in harvests, and an 11 percent increase in output prices compared to less intensive areas. These empirical patterns help constrain key model elasticities. The authors determine that the optimal policy response must balance reallocating production toward less fertilizer-dependent regions while mitigating consumption losses in heavily dependent ones. Quantitatively, these opposing forces offset each other, leading to the conclusion that maintaining a steady 10 percent subsidy rate is optimal both before and after the external price shock, highlighting the resilience of specific subsidy structures in crisis management.