The capitalization of CAP payments into land rental prices: a grouped fixed-effects estimator

ABSTRACT

This article investigates the capitalization of farm subsidies in Italy by relying on a novel approach based on the Grouped Fixed Effect (GFE) estimator. This methodology allows us to account for the regional unobserved time-varying determinants of the Italian land values. Results show that the elasticity of land price with respect to coupled and decoupled subsidies is below one. Particularly, for the latter payments, the degree of capitalization declines with decreasing competition in farmland markets.

KEYWORDS:

• Common Agricultural Policy (CAP)
• land values
• subsidy capitalization
• grouped Fixed Effect Estimator (GFE)

JEL CLASSIFICATIONS:

• Q18
• C33
• H22
• Q15

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Pillar I payments are subsidies intended for all farms, in proportion to the amount of land and/or livestock. They can be linked to certain productions (coupled payments), or independent of production choices (decoupled payments, also known as single farm payment – SFP). Pillar II support is intended for a limited number of farms, which voluntarily engage in certain activities (investments, reduction of chemical inputs, organic agriculture, and diversification of farm activities).

² As a proxy for the degree of competition in farmland markets, we use the Gini index of operational agricultural land. A higher Gini index indicates greater inequality, with a small number of larger farms controlling much larger percentages of total farmland. The median value of the Gini index allows to construct the competitive dummy variable. The latter takes on the value 1 (high level of competition) if the NUTS3’s Gini index is below the median, 0 otherwise.

³ The other covariates, such as the arable of crops and the agricultural gross values added have the expected sign and most are statistically significant.

Additional information

Funding

This study has been supported by Fondazione Cariplo, within the research project 'Evaluation of CAP 2015-2020 and taking action – CAPTION' [Project Id: 2017-2513].