The effect of decoupled direct payments on farm exit behaviour: quasi-experimental evidence from Europe

As a consequence of the recent reform of the Common Agricultural Policy the agricultural sector throughout the EU is undergoing a process of major structural change. The removal of direct payments and price support policies are expected to change farmers' behaviour and force them to reconsider their participation in agricultural production. In this paper we perform an ex-post cross-country farm level empirical analysis of farmers' market exit behaviour in response to these reforms. Using a panel dataset for the EU15 countries for the period 2001-2005, we apply quasi-experimental empirical methods to identify the causal relationship between the decoupling policy and farm market exit. Our analysis shows that, contrary to a priori expectations, the probability of farm exit decreased due to the policy change, particularly for farms where payments are only partially decoupled. We also find, however, that the reform facilitated exit for farms that had already made the decision to leave the sector.