Assessing the Decoupling of EU Agricultural Policy on Farm Decisions - A Dynamic Stochastic Attempt

The Common Agriculture Policy (CAP) reform in 2003 decoupled the farm payments from production, the 2014-2020 reform decides a shift of direct payments from land to active farms. In order to study the impact of the CAP reforms on farmers' production, consumption and investment decisions, we develop a stochastic dynamic farm model with price risk and productivity risk. We structural-estimate the model's deep parameters, in particular, the risk preference parameter, using particle filter and MCMC method. The solution of the model shows that the representative farmer's decision rules on consumption and investment vary with different risk preferences. We expect a change of the farmer's risk aversion level before and after CAP reform. However, due to the quality of data and the in developing non-linear filtering technique, the crucial deep parameters are not statistically identified.