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European Review of Agricultural Economics 2005 32(1):1-23; doi:10.1093/erae/jbi005
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Vol. 32 No. 1 Oxford University Press and Foundation for the European Review of Agricultural Economics 2005; all rights reserved. For permissions, please email journals.permissions@oupjournals.org; all rights reserved

Agricultural policy uncertainty and farm level adjustments—the case of direct payments and incentives for farmland investment

Carl Johan Lagerkvist

Uppsala, Sweden

Corresponding author: Carl Johan Lagerkvist, Department of Economics, P.O. Box 7013, SE-750 07 Uppsala, Sweden. Email: carl-johan.lagerkvist{at}ekon.slu.se

Received April 2004; Revision received February 2005.

Summary

A dynamic stochastic business-level land valuation model is derived to analyse how agricultural policy uncertainty regarding reform of the CAP area payment system affects farmland investment incentives. Subjective probability beliefs of Swedish farmers were collected in a survey and used to illustrate the implications of the model. The results show the working of adjustments in current farmland investment incentives triggered by the announcement of agricultural policy programmes linked to farmland. Lack of complete information causes inefficiency by inducing farm operators to over-invest before the reform date if they expect a reform that is likely to reduce their area payment. Policy uncertainty has surprisingly volatile and ambiguous effects on farmland investment incentives.

Keywords: policy uncertainty, agricultural policy, investment, farmland value, land rent


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