Abstract

The EU's farmers are no longer required to produce commodities to receive direct payments as long as they keep their land in good condition. Some believe this is bad for development because it encourages passive farming. We evaluate, using a real options approach, the implications of decoupled payments for the desirability and optimal timing of agricultural land development when considering sunk investment costs and uncertain future returns. We find that decoupled payments accelerate development while passive farming increases, by adding managerial flexibility, the value associated with land. We then use the Nash bargaining solution to identify the rental share to be paid for leasing land. We show that a deal for the lease of land can always be reached, but that the facility to use passive farming as an outside option allows landowners to extract policy rents, thereby undermining the potential for the Basic Payment Scheme to support tenant farmers' incomes.

Keywords

Common Agricultural Policy; Decoupled payments; Capitalization; Real options; Bargaining

Published in

Land Use Policy
2019, Volume: 80, pages: 32-46
Publisher: ELSEVIER SCI LTD

SLU Authors

• Brady, Mark

  • Department of Economics, Swedish University of Agricultural Sciences
    
  • Lund University

UKÄ Subject classification

Economics


Publication identifier

DOI: https://doi.org/10.1016/j.landusepol.2018.09.029

Permanent link to this page (URI)

https://res.slu.se/id/publ/97741