Distributive Effects of DirectPayments in German Agricultureunder the New Common AgriculturalPolicy of the European Union

The Common Agricultural Policy (CAP)of the European Union has been in a process ofreform for quite some time. As a result of reforms,agricultural market regulations have become moreliberal and direct payments which are to a largeextent decoupled from production have beenintroduced. In this paper, we investigate the effectsof the direct payments to farmers on inequality ofprofits in German agriculture. For this purpose,we decompose absolute and relative inequality intotal farm profits into the partial effects of marketincome and direct payments. Key results of ouranalysis are that the direct payments employedunder the New CAP contribute to about one thirdof the observed income inequality in family farmsand to almost 75 percent in large incorporatedfarms. The introduction of payment limitationsat E 100,000 and E 300,000 would not affect thevast majority of farms. Payment limitations would,however, affect large farms. Most of the largeincorporated farms would make negative profitsunder a payment limitation scheme. This would actto increase social welfare, as it would force themto go out of business, or to restructure and becomeeconomically efficient....