The Labour Allocation Decisions of Farm Households: Defining a theoretical model. Factor Markets Working Paper No. 31, October 2012

This paper presents a theoretical model for the analysis of decisions regarding farm household labour allocation. The agricultural household model is selected as the most appropriate theoretical framework; a model based on the assumption that households behave to maximise utility, which is a function of consumption and leisure, and is subject to time and budget constraints. The model can be used to describe the role of government subsidies in farm household labour allocation decisions; in particular the impact of decoupled subsidies on labour allocation can be examined. Decoupled subsidies are a labour-free payment and as such represent an increase in labour-free income or wealth. An increase in wealth allows farm households to work less while maintaining consumption. On the other hand, decoupled subsidies represent a decline in the return to farm labour and may lead to a substitution effect, i.e., farmers may choose to substitute non-farm work for farm work. The theoretical framework proposed in this paper allows for the examination of these two conflicting effects.

Influence of the Common Agricultural Policy and Heterogeneous Land Quality on Land Rent and Land Allocation. Factor Markets Working Paper No. 38, March 2013

Against the background of the current discussion about the EU’s common agricultural policy (CAP) after 2013, the question of the impact of government support on land prices is crucially important. Validation of the CAP’s success also hinges on a proper assessment of a choice of policy instruments. This study therefore has the objective of investigating on a theoretical basis the effects of different government support measures on land rental prices and land allocation. The different measures under consideration are the price support, area payments and decoupled single farm payments (SFPs) of the CAP. Our approach evaluates the potential impact of each measure based on a Ricardian land rent model with heterogeneous land quality and multiple land uses. We start with a simple model of one output and two inputs, where a Cobb-Douglas production technology is assumed between the two factors of land and non-land inputs. In a second step, an outside option is introduced. This outside option, as opposed to land use of the Ricardian type, is independent of land quality. The results show that area payments and SFPs become fully capitalised into land rents, whereas in a price support scheme the capitalisation depends on per-acreage productivity. Moreover, in a price support scheme and a historical model, the capitalisation is positively influenced by land quality. Both area payments and price supports influence land allocation across different uses compared with no subsidies, where the shift tends to be larger in an area payment scheme than in a price support scheme. By contrast, SFPs do not influence land allocation.