Revisiting the impact of decoupled subsidies on farm performance: a counterfactual analysis using microdata

The 2003 reform of the Common Agricultural Policy, which decoupled farm subsidies from production, was expected to increase farmers’ market orientation and to positively impact farm productivity. This theoretical effect of decoupling on farm performance has been verified in a few ex-post analyses. However, these studies lack important aspects of farm-level policy impact evaluations. First, they do not use a well-defined counterfactual scenario, second they do not account for farm heterogeneity when measuring performance and third they do not assess farm performance in a comprehensive manner. We address these shortcomings by combining quasi-experimental empirical methods with a latent-class production function. Using UK and French farm-level data, we show that farms indeed operate with distinct production technologies and that decoupling had positive and significant effects on productivity. Our results further show that under decoupling, farmers tend to diversify their businesses while keeping environmental pressure at a similar level as with coupled support.