IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Do decoupled payments affect investment financing constraints? Evidence from Irish agriculture

  • Conor O'Toole


    (Department of Economics, Trinity College Dublin and Economic and Social Research Institute)

  • Thia Hennessy



This paper empirically tests whether decoupled subsidies decrease investment financing constraints faced by farms. Using a panel dataset from Ireland over the period 2005-2010, we test whether the CAP decoupled subsidy payments reduce credit constraints by altering the risk profile of farm earnings. We test for financing constraints in a neoclassical Q model using a measure of the financial composition of capital in ows as well as investment-cash ow sensitivities. Our econometric methodology controls for censoring, heterogeneity and endogeneity. We find that decoupled subsidies do reduce credit constraints and the result is robust to model selection and constraint measurement. The effect is greater for farms who face higher constraints: medium-sized farms relative to large farms and middle-age and older farm operators relative to younger farmers. This evidence suggests that, over and above the effect on production indicated in previous research, decoupling affects farm investment through financial channels.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Trinity College Dublin, Department of Economics in its series Trinity Economics Papers with number tep0113.

in new window

Length: 35 pages
Date of creation: Aug 2013
Date of revision:
Handle: RePEc:tcd:tcduee:tep0113
Contact details of provider: Postal: Trinity College, Dublin 2
Phone: (+ 353 1) 6081325
Fax: 6772503
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. David A. Hennessy, 1998. "The Production Effects of Agricultural Income Support Policies under Uncertainty," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 46-57.
  2. Conor M. O'Toole & Carol Newman & Thia Hennessy, 2011. "The role of fundamental Q and financing frictions in agricultural investment decisions: an analysis pre and post financial crisis," Trinity Economics Papers tep0311, Trinity College Dublin, Department of Economics.
  3. Barry K. Goodwin & Ashok K. Mishra, 2006. "Are “Decoupled” Farm Program Payments Really Decoupled? An Empirical Evaluation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(1), pages 73-89.
  4. Alan Matthews & Carol Newman & Fiona Thorne, 2006. "Productivity in Irish Agriculture," Working Papers 0614, Rural Economy and Development Programme,Teagasc.
  5. Huang, Zhangkai, 2003. "Evidence of a bank lending channel in the UK," Journal of Banking & Finance, Elsevier, vol. 27(3), pages 491-510, March.
  6. Weber, Jeremy G. & Key, Nigel D., 2011. "How Much Do Decoupled Payments Affect Production? An Instrumental Variable Approach with Panel Data," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 103455, Agricultural and Applied Economics Association.
  7. Paolo Sckokai & Jes�s Ant�n, 2005. "The Degree of Decoupling of Area Payments for Arable Crops in the European Union," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(5), pages 1220-1228.
  8. Anil K Kashyap & Jeremy C. Stein & David W. Wilcox, 1992. "Monetary Policy and Credit Conditions: Evidence From the Composition of External Finance," NBER Working Papers 4015, National Bureau of Economic Research, Inc.
  9. Ralph Bierlen & Allen M. Featherstone, 1998. "Fundamental q, Cash Flow, and Investment: Evidence from Farm Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 427-435, August.
  10. Laure Latruffe & Sophia Davidova & Elodie Douarin & Matthew Gorton, 2008. "Farm expansion in Lithuania after accession to the EU: The role of CAP payments in alleviating potential credit constraints," Working Papers SMART - LERECO 08-06, INRA UMR SMART.
  11. Andrius Kazukauskas & Carol Newman & Johannes Sauer, 2014. "The impact of decoupled subsidies on productivity in agriculture: a cross-country analysis using microdata," Agricultural Economics, International Association of Agricultural Economists, vol. 45(3), pages 327-336, 05.
  12. Bougheas, Spiros & Mizen, Paul & Yalcin, Cihan, 2006. "Access to external finance: Theory and evidence on the impact of monetary policy and firm-specific characteristics," Journal of Banking & Finance, Elsevier, vol. 30(1), pages 199-227, January.
  13. Sergo Gomez i Paloma & Vittorio Galerani & Meri Ragi & Davide Viagi & Dimitar Nikolov, 2008. "Methodological Approach for Evaluation ff Investment Behavior of Farmers in Different Development Scenarios," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 5, pages 81-96.
  14. Davide Viaggi & Meri Raggi & Vittorio Gallerani & Sergio Paloma, 2010. "The impact of EU common agricultural policy decoupling on farm households: Income vs. investment effects," Intereconomics: Review of European Economic Policy, Springer, vol. 45(3), pages 188-192, May.
  15. 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.
  16. Barry K. Goodwin & Ashok K. Mishra, 2005. "Another Look at Decoupling: Additional Evidence on the Production Effects of Direct Payments," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(5), pages 1200-1210.
  17. Femenia, Fabienne & Gohin, Alexandre & Carpentier, Alain, 2008. "The decoupling of farm programs: Revisiting the wealth effect," 108th Seminar, February 8-9, 2008, Warsaw, Poland 48107, European Association of Agricultural Economists.
  18. Viaggi, Davide & Raggi, Meri & Gomez y Paloma, Sergio, 2011. "Farm-household investment behaviour and the CAP decoupling: Methodological issues in assessing policy impacts," Journal of Policy Modeling, Elsevier, vol. 33(1), pages 127-145, January.
  19. Petrick, Martin, 2003. "Empirical measurement of credit rationing in agriculture: a methodological survey," IAMO Discussion Papers 45, Leibniz Institute of Agricultural Development in Central and Eastern Europe (IAMO).
  20. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  21. Gallerani, Vittorio & Gomez y Paloma, Sergio & Raggi, Meri & Viaggi, Davide, 2008. "Modelling The Effect Of Eu Policy Reforms On Farm Investment Behaviour," 107th Seminar, January 30-February 1, 2008, Sevilla, Spain 6444, European Association of Agricultural Economists.
  22. Whited, Toni M, 1998. "Why Do Investment Euler Equations Fail?," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 479-88, October.
  23. Petrick, Martin, 2004. "Farm investment, credit rationing, and governmentally promoted credit access in Poland: a cross-sectional analysis," Food Policy, Elsevier, vol. 29(3), pages 275-294, June.
  24. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  25. Catherine Benjamin & Euan Phimister, 2002. "Does Capital Market Structure Affect Farm Investment? A Comparison using French and British Farm-Level Panel Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(4), pages 1115-1129.
  26. Fabio R. Chaddad & Michael L. Cook & Thomas Heckelei, 2005. "Testing for the Presence of Financial Constraints in US Agricultural Cooperatives: An Investment Behaviour Approach," Journal of Agricultural Economics, Wiley Blackwell, vol. 56(3), pages 385-397.
  27. Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1027-1057, October.
  28. Oecd, 2005. "Dynamic Econometric Models of Crop Investment in Manitoba and Production under Risk Aversion and Uncertainty," OECD Papers, OECD Publishing, vol. 5(11), pages 1-55.
  29. Andrew M. Jones & José M. Labeaga, 2003. "Individual heterogeneity and censoring in panel data estimates of tobacco expenditure," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(2), pages 157-177.
  30. Teresa Serra & Spiro Stefanou & José M. Gil & Allen Featherstone, 2009. "Investment rigidity and policy measures," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 36(1), pages 103-120, March.
  31. Paolo Sckokai & Daniele Moro, 2009. "Modelling the impact of the CAP Single Farm Payment on farm investment and output," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 36(3), pages 395-423, September.
  32. Simona Mateut & Alessandra Guariglia, . "Inventory Investment, Global Engagement, and Financial Constraints in the UK: Evidence from Micro Data," Discussion Papers 09/09, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  33. Christopher A. Hennessy, 2004. "Tobin's "Q", Debt Overhang, and Investment," Journal of Finance, American Finance Association, vol. 59(4), pages 1717-1742, 08.
  34. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-95, November.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:tcd:tcduee:tep0113. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Patricia Hughes)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.