Abstract
I analyze the interaction of two institutions, markets and public policies, and their effect on structural change in agriculture. More specifically, I consider how subsidies affect functioning of input and output markets, and the selection of business strategies within them. The main hypothesis is that subsidies affect these markets differently, and that allows rent-seeking that hinders the overall productivity of the sector. I apply a replicator dynamics model for the task. I test my hypothesis with the EU’s 2003 CAP reform. The data is comprehensive microdata of Finnish grain and oilseed farms for years the 2004–2013. In order to examine distributional level shifts, I use quantile regression techniques. I find that the policy incentives have directed sectoral change more strongly than market incentives and have thus significantly affected production decisions. The subsidies have also attenuated the market signals and therefore increased sectoral inefficiency. The reform that aimed to improve market orientation has had little effect. The reform has affected structural change in input and output markets differently. While land use adjustment has become more rigid for all the farms, especially the more market oriented ones have been able to exploit increased output market flexibility. However, the negative effects are more prominent in total and the net effect of the reform was negative.
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Notes
See Bhaskar and Beghin (2009) for a more complete survey on theoretical and empirical considerations of DPs.
The crops eligible for a subsidy payment included set-asides. The study period coincides with a 10% set-aside requirement that was originally designed to curb over-production.
Finland is divided to seven main subsidy regions that roughly correspond to climatic conditions. Per hectare subsidy payments increase from south to north in total, although there is some variation between subsidy types. See map in AAppendix.
Finland decoupled 90% of its CAP payments. Coupled payments remained dominant in beef and sheep sectors. In plant production, rye and oilseeds kept receiving subsidies coupled to production. Finland also pays national subsidies on top of the EU’s payments and they include coupled payments, e.g. in dairy.
Along the tendency of curtailing market distortions, the EU’s CAP has evolved toward supporting the multi-functional elements of agriculture, e.g. the environment and rural livelihoods. The incentives in these two ”pillars” of the CAP are possibly not fully compatible.
Cantner et al. (2012) used DEA for constructing a fitness factor based on discrete quality differences of German cars in order to overcome the problem of heterogeneous products.
Active farm is defined as a farm that has at least one hectare of land in cultivation or animals amounting to at least one animal unit.
See extended discussion on sunk costs and replicator dynamics in Hölzl (2015).
I am grateful for an anonymous referee for suggesting this illustration.
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The datasets generated during and/or analyzed during the current study are not publicly available due to confidentiality of individual farm enterprises but are available from the corresponding author on reasonable request.
Appendix: Subsidy regions
Appendix: Subsidy regions
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Simola, A. Government payments, market profits and structural change in agriculture. J Evol Econ 28, 837–857 (2018). https://doi.org/10.1007/s00191-018-0583-3
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DOI: https://doi.org/10.1007/s00191-018-0583-3