The effect of subsidies on the efficiency of farms in the Liberecký region

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JEL classification

• State and Local Taxation, Subsidies, and Revenue
• Agricultural Policy; Food Policy

Keywords

agricultural subsidies, stochastic frontier analysis, technical efficiency, true fixed effects model

Abstract

The aim of the paper is to assess the impact of subsidies on the technical efficiency of agricultural holdings in the Liberecký region. A parametric method – stochastic frontier analysis – was used. A true fixed effects model was estimated, assuming a Cobb-Douglas production function with variance of inefficiency explained by explanatory variables. The results reveal that direct payments and agri-environmental payments tend to increase inefficiency, whereas subsidies for Least Favourable Areas have a positive effect on the efficiency of agricultural holdings. The effect of Rural Development Programme subsidies is not statistically significant. Based on our results, we suggest lowering the entitlements (direct payments and agro-environmental measures) as they seem to lower farmers’ motivation to engage in efficient production.