Title : Do subsidies improve technical efficiency of EU farms? An empirical analysis of the Common Agricultural Policy after decoupling
Abstract:
The Common Agricultural Policy (CAP) is an important instrument in the hands of the European Commission to support the economic viability of farms in European Union (EU) countries. The Farm Accountancy Data Network (FADN), a system of annual sample surveys on EU farms, has permitted a large literature on the assessment of the effectiveness of CAP subsidies since their introduction in 1962. Most of this literature has highlighted that subsidies are able to increase farm income, but they may also decrease technical efficiency. Technical efficiency refers to the maximization of the output that can be produced with a given set of inputs, therefore it is an important objective to pursue in order to satisfy the food demand with the least possible environmental impact. The negative effect of subsidies on technical efficiency can be attributed to income stabilization that may discourage farmers to exploit at best the available technology. In 2003, a new attribution scheme was implemented, where decoupled subsidies, i.e., lump sum payments based on cultivation or maintenance of land, were also introduced. Since then, the empirical literature has paid great effort to assess whether the new scheme was able to prevent the negative effect of subsidies on technical efficiency. Unfortunately, most existing studies focus on a limited number of EU countries, typologies of subsidies and temporal interval, therefore an overall assessment of the impact of CAP subsides on technical efficiency is currently unavailable. In this talk, we try to overcome the limitations of existing studies by considering the period 2004-2020 (17 years) and 131 EU regions, i.e., all time points and geographical regions currently available in the FADN since decoupling, as well as all typologies of subsidies, i.e., on production, on investments, for rural development, and decoupled ones. A panel stochastic frontier model with translog production function is fitted to regionally aggregated data separately for three different classes of economic size. In our results, all the typologies of subsidies have a significantly positive effect on technical efficiency in most countries, especially subsidies on production and decoupling subsidies, with a greater prevalence of significantly negative effects across EU countries as the economic size increases. The magnitude of the estimated effects across EU countries and classes of economic size provides a valuable information about regional differences among EU farms that could guide future refinements of the CAP towards an increasingly sustainable development of EU agriculture.
