Unintended consequences of environmental policies: the case of set-aside and agricultural intensification

Set-aside policies providing agronomic and ecological benefits have been mainstream practices in European agriculture. Because they may lead to intensification on cultivated land, they can however have mixed environmental effects. To evaluate the indirect impact of a set-aside policy on crop intensification, we consider two elasticity indicators with respect to set-aside subsidy: chemical input demand and intensity of input use. We estimate a structural, multi-output model on a panel of French farmers from 2006 to 2010, accounting for multivariate selection (corner solutions) on crops and land use, with a semi nonparametric Quasi-Maximum Likelihood estimator robust to deviations from normality and homoskedasticity. Results show that a set-aside subsidy can provide farmers with incentives to intensify their production, leading to potential adverse environmental effects that can however be offset by a complementary tax policy instrument.