Technical change and the Common Agricultural Policy

This paper adopts an alternative method for the analysis of the CAP's impact on farms' productivity based on a system of equations derived from a non-nested three-factors CES production function. With this method, we estimate the elasticity of substitution between labour, capital, and land in the EU agricultural sector, the magnitude and direction of technical change, and the impact of the CAP subsidies. The system of equations is estimated using the GMM estimator on a farm-level panel dataset covering 117,179 farms from all EU MS for the period from 2004 to 2015. Our results suggest that land, labour, and capital in EU farms are complementary production factors characterised by a slow decline or stagnation in the land-, labour-, and capital-augmented technical change. Higher levels of Pillar I and Pillar II CAP payments as percentage of total agricultural in-come have negative or no impact on farms' technical change, but higher nominal amounts of Pillar I decoupled subsidies, Pillar II investment and LFA subsidies have a positive impact. Moreover, the larger the share of subsidies in total agricultural income the stronger is the negative impact of the CAP on agricultural technical change.

Automated summary

This study adopts an alternative method to analyze the impact of CAP on farms' productivity in the EU agricultural sector. The results show that land, labour, and capital in EU farms are complementary production factors with slow growth or stagnation in technical change. The study also finds that the impact of CAP subsidies on farms' technical change varies, with higher amounts of decoupled subsidies, investment, and LFA subsidies having a positive impact, while a larger share of subsidies in total agricultural income leads to a stronger negative impact of the CAP on agricultural technical change.