Do agricultural subsidies crowd out or stimulate rural credit institutions? The Case of CAP Payments

Pavel Ciaian and Jan Pokrivcak

No 117485, Working papers from Factor Markets, Centre for European Policy Studies

Abstract: In this paper we estimate the impact of subsidies from the EU’s common agricultural policy on farm bank loans. According to the theoretical results, if subsidies are paid at the beginning of the growing season they may reduce bank loans, whereas if they are paid at the end of the season they increase bank loans, but these results are conditional on whether farms are credit constrained and on the relative cost of internal and external financing. In the empirical analysis, we use farm-level panel data from the Farm Accountancy Data Network to test the theoretical predictions for the period 1995–2007. We employ fixed-effects and generalised method of moment models to estimate the impact of subsidies on farm loans. The results suggest that subsidies influence farm loans and the effects tend to be non-linear and indirect. The results also indicate that both coupled and decoupled subsidies stimulate long-term loans, but the long-term loans of large farms increase more than those of small farms, owing to decoupled subsidies. Furthermore, the results imply that short-term loans are affected only by decoupled subsidies, and they are altered by decoupled subsidies more for small farms than for large farms; however, when controlling for endogeneity, only the decoupled payments affect loans and the relationship is non-linear.

Keywords: Agricultural and Food Policy; Agricultural Finance; Political Economy (search for similar items in EconPapers)
Pages: 25
Date: 2011-09
New Economics Papers: this item is included in nep-agr
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Citations: View citations in EconPapers (9)

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Working Paper: Do agricultural subsidies crowd out or stimulate rural credit institutions? The Case of CAP Payments (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:famawp:117485

DOI: 10.22004/ag.econ.117485

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