Do subsidies matter in productivity and profitability changes?

Why should the producers be subsidized? What are the contributions and channels of subsidies in total factor productivity (TFP) and profitability changes? We address these in a novel way by decomposing TFP and profitability changes into technical change, scale economies, subsidies, input and output misallocations, and inefficiency. A battery of models is deployed to answer these questions, instead of using a single model as done in past studies. First, we use both parametric and nonparametric approaches and estimate them treating subsidies as either exogenous or endogenous. Second, we reexamine both approaches with and without inefficiency. Third, we check the robustness of results across different models using a panel of Norwegian farms. The empirical results show an overall increase of 2.3% per annum in profitability in which the subsidy, scale, and inefficiency components contributed, on average, positively. It is important to note that the magnitude of these components varies across models.