Impact of CAP Pillar II Payments on Agricultural Productivity

The impact of agricultural subsidies on productivity has long been discussed in the literature without any clear conclusions. Many studies attempted to shed light on the topic by using various methods and data (mostly relying on geographically limited farm-level data). Depending on the model specification, statistical method and data source mixed results are reported. This study aims at estimating the impact of common agricultural policy Pillar II payments on agricultural productivity by using NUTS-2 (Nomenclature of territorial units for statistics) level data for the years 2007-2013 for the European Union member state countries. We use a rather novel approach by simultaneously estimating a Constant Elasticity of Supply production function with productivity coefficients linked to the Pillar II payments. We use 4 categories of Pillar II payments (i.e. human capital, physical capital, agro-environmental and rural development) to explain the total factor productivity in agricultural sector. Our results suggest that regions receiving higher Pillar II payments for physical capital investments, human capital development or agro-environmental measures increase productivity. On the other hand, payments related to rural development do not have significant impact on productivity. The results do not change among the member states, date of access to the European Union (i.e. old or new member states), spatial characteristics (i.e. being in the south, north or east) or size of the countries (i.e. big or small economies).