index, which is in the range of supply elasticities in the literature. Duffy and Wohlgenant (1991) use a
short-run supply elasticity for cotton of 0.3, and Duffy, Shalishali, and Kinnucan (1994) report a value of
0.92 for the cotton supply elasticity.
5. Simulation of Interaction Effects
The econometric results presented in the previous section allow us to estimate the change in the
price and quantity of cotton that has resulted from CRPP expenditures. To simulate the market with a
marginal increase in CRPP expenditures, we simply increase those expenditures by 1 percent and observe
what the supply and demand responses would look like. The simulated equilibrium provides the
information necessary to calculate the return on investment (ROI) for producers.
To measure the effect of the CRPP on domestic producers in the absence of distortions from the
LDP and Step 2 programs, the proportionate change in price expected to result from a marginal change in
CRPP expenditures was simulated using
s1b1EA + s1b2ENAR
(18)
’ s =-------------------------------------------------------
cd e - sι(η + ηfdηf) - (1-sι)(∏χ + ηfdηf)
where E in front of a variable denotes a proportional change in that variable; s1 is the share of domestic
cotton production sold domestically; e is the estimated supply elasticity; η is the estimated domestic
demand elasticity; ηχ is the estimated eχport demand elasticity; ηfd is the estimated elasticity of price
transmission between U.S. and foreign cotton prices; ηf is the estimated elasticity of U.S. mill
consumption with respect to the foreign cotton price; ηχf is the estimated elasticity of eχport demand with
respect to the foreign cotton price; PS is the effective price received by domestic producers;25 A is
promotional eχpenditures; NAR is nonagricultural research eχpenditures; and β1 and β2 are the domestic
promotion and nonagricultural research elasticities, respectively. For more details on the derivation of
this equation, see Murray et al. (2001).
25Note that this price is generally not the same as the price paid by demanders because of gaps created by the
assessment, by U.S. government subsidies to buyers of U.S. cotton, and by government support payments to
producers.
23