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Production Effects of Direct Payments to Active Farmers: a Microeconomic Dynamic and Stochastic Analysis

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  • Carpentier, Alain
  • Gohin, Alexandre
  • Heinzel, Christoph

Abstract

For the 2014-2020 phase of the Common Agricultural Policy, the European Commission has the opportunity to reduce the leakage of public support to landowners and to better target it towards active farmers. Our purpose is to assess whether shifting the basis of direct payments from land towards active farmers will significantly alter agricultural production decisions. In a dynamic and stochastic microeconomic framework, we identify the impact of this shift on the farm household’s production and consumption decisions. In the dynamic setting the production impacts of direct payments are much higher than previously quantified, because the “long run” absolute risk aversion (associated with the value function) is lower than the “short run” one (associated with direct utility). In our dynamic setting, the impact profiles are opposed for initially poor and initially wealthy farmers, due to their different precautionary motives. Leakage to land owners is lower with an active-farmer than with a land subsidy, so that the production impact is higher.

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Bibliographic Info

Paper provided by European Association of Agricultural Economists in its series 123rd Seminar, February 23-24, 2012, Dublin, Ireland with number 122447.

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Date of creation: 24 Feb 2012
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Handle: RePEc:ags:eaa123:122447

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Keywords: Risk and Uncertainty;

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  1. Neave, Edwin H., 1971. "Multiperiod consumption-investment decisions and risk preference," Journal of Economic Theory, Elsevier, vol. 3(1), pages 40-53, March.
  2. Hennessy, David A., 1998. "The Production Effects of Agricultural Income Support Policies Under Uncertainty," Staff General Research Papers 1207, Iowa State University, Department of Economics.
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  5. James Vercammen, 2007. "Farm bankruptcy risk as a link between direct payments and agricultural investment," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 34(4), pages 479-500, December.
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  8. Fabienne Femenia & Alexandre Gohin & Alain Carpentier, 2010. "The Decoupling of Farm Programs: Revisiting the Wealth Effect," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 92(3), pages 836-848.
  9. Meyer, Donald J. & Meyer, Jack, 2005. "Risk preferences in multi-period consumption models, the equity premium puzzle, and habit formation utility," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1497-1515, November.
  10. Joe Dewbre, 2006. "The Impact of Coupled and Decoupled Government Subsidies on Off-Farm Labor Participation of U.S. Farm Operators," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(2), pages 393-408.
  11. Chau, Nancy H. & de Gorter, Harry, 2001. "Disentandling the Consequences of Direct Payment Schemes in Agriculture on Fixed Costs, Exit Decisions and Output," Working Papers 127663, Cornell University, Department of Applied Economics and Management.
  12. Bhaskar, Arathi & Beghin, John C., 2007. "Decoupled Farm Payments and the Role of Base Acreage and Yield Updating Under Uncertainty," Staff General Research Papers 12851, Iowa State University, Department of Economics.
  13. Bhaskar, Arathi & Beghin, John C., 2009. "How Coupled Are Decoupled Farm Payments? A Review of the Evidence," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 34(1), April.
  14. Nigel Key & Michael J. Roberts, 2009. "Nonpecuniary Benefits to Farming: Implications for Supply Response to Decoupled Payments," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(1), pages 1-18.
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Cited by:
  1. Rizov, Marian & Pokrivcak, Jan & Ciaian, Pavel, 2012. "CAP subsidies and productivity of the EU farms," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 124970, International Association of Agricultural Economists.

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