Modelling the Impact of the CAP Reform on Farm Investments

In this paper we evaluate empirically the impact of policies on farm investment and output decisions, considering risk-averse farmers making inter-temporal choices on current and future profits. We refer specifically to the recent reform of the CAP, while estimation and simulation results are carried out on a FADN sample of Italian arable crop farms. The main message of the paper is that a policy change that shifts resources from price support to direct payments tend to consistently reduce farm investments, mainly as a result of the increased output price volatility, which increases the level of uncertainty faced by farmers. However, this is not clearly reflected in a negative impact on farm output