Using a recently implemented Price Deficiency Payments (PDP) policy in India, we examine how PDP affects farm-gate prices and crop supply. We document a new channel, the fall in reservation price of farmers under PDP, behind the decline in farm-gate prices. This impact depends on the magnitude of the deficiency payments and can lead to a supply glut and price crash. Empirically, the scheme led to a 4 percent decrease in farm-gate prices and a 42 percent increase in market arrivals for Black-gram, a crop with very high PDP. Using bid-level data on crop auctions, we rule out collusion among the market participants, another potential channel for price crash under PDP. The effects of the policy are transitory and disappear after it is withdrawn in the next harvest season. In terms of welfare effects, this scheme is associated with a monetary loss of INR 1 billion.