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European Review of Agricultural Economics 2007 34(4):479-500; doi:10.1093/erae/jbm040
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© Oxford University Press and Foundation for the European Review of Agricultural Economics 2007; all rights reserved. For permissions, please email journals.permissions@oxfordjournals.org

Farm bankruptcy risk as a link between direct payments and agricultural investment

James Vercammen

University of British Columbia, Vancouver, Canada

Corresponding author: Professor James Vercammen, Sauder School of Business, 2053 Main Mall, Vancouver, British Columbia, Canada, V6T 1Z2. E-mail: james.vercammen{at}ubc.ca

Received January 2006; Revision received September 2007. The European Union is increasingly relying on direct payments to support farm incomes. Recent research has shown that a direct payment may increase production and investment by risk-averse farmers via a link between wealth, risk aversion and decision making. This paper shows that, even in the absence of risk aversion, a direct payment may stimulate farm investment. With lenders using a standard insolvency rule for determining bankruptcy, the direct payment raises the expected value of marginal investment because it reduces the risk of bankruptcy over the farmer's operating time horizon. The investment response to the direct payment is larger for a farmer with an intermediate versus low or high level of equity, and for a farmer with a long versus short-time horizon.

Keywords: direct payment, decoupling, farm investment, bankruptcy

JEL classification: Q14, Q12, Q18


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