Capitalization of the SPS into Agricultural Land Rental Prices under Harmonization of Payments

This paper provides estimates of the capitalization of the Single Payment Scheme (SPS) payment of the Common Agricultural Policy (CAP) on agricultural land rental rates. We address problems of unobserved heterogeneity and sample selection. As the 2013 CAP Reform calls for the harmonization of SPS payments, we estimate the implications of this mandate on agricultural land rental rates over time as Germany began harmonizing payments in 2010. Using Bavarian farm level panel data we find strong capitalization effects that increase substantially in the years following 2009. On average, the marginal effect on rental rates of an additional SPS euro is 38 cents, growing over time to 57 cents as harmonization develops.