Abstract:This paper firstly analyses the impact of agricultural subsidy on farmer’s behavior of land use,capital input and labor location.Then this paper estimates the effect of agricultural subsidy on farmer’s production behavior using rural household panel data from 2006 to 2010 in Hubei province.The result shows that three kinds of subsidies including grain subsidy,seed subsidy and capital goods subsidies have positive effect on grain production,and the expansion of grain area causes more expenses on capital goods and production service.However,these three kinds of subsidies have different effects on farmers’ production behavior.The effect of production subsidy is bigger than that of income subsidy.There is no effect of agricultural machinery subsidy on crop area and grain area.Meanwhile,due to the increase of large agricultural machinery service supply,production service expenses of farmers are increasing.Thus,government should increase the production subsidy and design agricultural production service subsidy.