CAP Subsidies and Productivity of the EU Farms

The paper investigates the impact of the Common Agricultural Policy ( CAP ) subsidies on farm total factor productivity ( TFP ) in the European Union ( EU ). We employ a structural semi‐parametric estimation algorithm directly incorporating the effect of subsidies into a model of unobserved productivity. We empirically study the effects using the Farm Accountancy Data Network ( FADN ) samples for the EU ‐15 countries. Our main findings are clear: subsidies impact negatively on farm productivity in the period before the decoupling reform was implemented; after decoupling the effect of subsidies on productivity is more nuanced and in several countries it turned positive.