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Do agricultural subsidies crowd out or stimulate rural credit market institutions? The case of EU Common Agricultural Policy

  • Ciaian, Pavel
  • Pokrivcak, Jan and Katarina Szegenyova

In this paper we estimate the impact of agricultural subsidies granted under the European Union’s Common Agricultural Policy (CAP) on bank loans extended to farms. According to our theoretical analysis, subsidies may either stimulate or crowd out bank loans depending on the timing of subsidies, severity of credit constraint, type of subsidies and bank loans, and the relative cost of internal and external financing. In empirical analysis we use the Farm Accountancy Data Network (FADN) farm level panel data for the period 1995-2007. We employ the fixed effects and generalised method of moment (GMM) models. The estimated results suggest that (i) big farms tend to use subsidies to increase long-term loans, whereas small farms tend to use subsidies to obtain short-term loans; (ii) subsidies tend to crowd out short-term loans for big farms and long-term loans for small farms; (iii) when controlling for the endogeneity, the crowding out effect becomes smaller, but the positive causal effect of subsidies on bank loans remains significant.

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Article provided by European Community Studies Association Austria (ECSA-A) in its journal European Integration online Papers (EIoP).

Volume (Year): 16 (2012)
Issue (Month): (November)

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Handle: RePEc:erp:eiopxx:p0231
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