Drivers of Agricultural Physical Capital Development: Theoretical Framework and Hypotheses. Factor Markets Working Paper No. 18, February 2012

This paper aims to identify drivers of physical capital adjustments in agriculture. It begins with a review of some of the most important theories and modelling approaches regarding firms’ adjustments of physical capital, ranging from output-based models to more recent approaches that consider irreversibility and uncertainty. Thereafter, it is suggested that determinants of physical capital adjustments in agriculture can be divided into three main groups, namely drivers related to: i) expected (risk-adjusted) profit, ii) expected societal benefits and costs and iii) expected private nonpecuniary benefits and costs. The discussion that follows focuses on the determinants belonging to the first group and covers aspects related to product market conditions, technological conditions, financial conditions and the role of firm structure and organization. Furthermore, the role of subjective beliefs is emphasized. The main part of this paper is concerned with the demand side of the physical capital market and one section also briefly discusses some aspects related to supply of farm assets.

The Theoretical Framework and Methodology to Estimate the Farm Labour and Other Factor-Derived Demand and Output Supply Systems. Factor Markets Working Document No. 44, May 2013

This paper provides a conceptual framework for the estimation of the farm labour and other factor-derived demand and output supply systems. In order to analyse the drivers of labour demand in agriculture and account for the impact of policies on those decisions, it is necessary to acknowledge the interaction between the different factor markets. For this purpose, we present a review of the theoretical background to primal and dual representations of production and some empirical literature that has made use of derived demand systems. The main focus of the empirical work is to study the effect of market distortions in one market, through inefficient pricing, on the demand for other inputs. Therefore, own-price and cross-price elasticities of demand become key variables in the analysis. The dual cost function is selected as the most appropriate approach, where input prices are assumed to be exogenous. A commonly employed specification – and one that is particularly convenient due to its flexible form – is the translog cost function. The analysis consists of estimating the system of cost-share equations, in order to obtain the derived demand functions for inputs. Thus, the elasticities of factor substitution can be used to examine the complementarity/substitutability between inputs.

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.

The Economics of State Aid for the Rescue and Restructuring of Firms in Difficulty: Theoretical Considerations, Empirical Analysis and Proposals for Reform. Bruges European Economic Research (BEER) Papers 27/September 2013

State aid for rescue and restructuring (R&R) of companies in difficulty causes a significant distortion of competition. It prevents the market from eliminating inefficient companies. Because of this, the European Commission has to be specially strict when it assesses rescue or restructuring aid. This paper examines recent cases of corporate restructuring partly funded with public money. It explains the main aspects of the current guidelines which are applicable to R&R State Aid and establishes a theoretical framework for the economic assessment of R&R aid. It then analyses decisions adopted by the European Commission concerning R&R state aid during the period 2000-2013. It finds that there is little economic rationale in the granting of R&R aid. The paper concludes by applying the lessons drawn from the empirical analysis to the anticipated revision of the R&R guidelines in the context of the State Aid Modernisation process.