Do decoupled payments affect investment financing constraints? Evidence from Irish agriculture

This paper empirically tests whether decoupled subsidies decrease investment financing constraints faced by farms. Using a panel dataset from Ireland over the period 2005-2010, we test whether the CAP decoupled subsidy payments reduce credit constraints by altering the risk profile of farm earnings. We test for financing constraints in a neoclassical Q model using investment-cash flow sensitivities. Our econometric methodology controls for censoring, heterogeneity and endogeneity. We find that decoupled subsidies do reduce credit constraints. The effect is greater for farms that face higher constraints: dairy farmers and younger farms. This evidence suggests that, over and above the effect on production indicated in previous research, decoupling affects farm investment through financial channels.