EU Land Markets and the Common Agricultural Policy

12 | CONCEPTUAL FRAMEWORKIndeed, several studies find that decoupled payments affect farm behaviourdifferently in the presence of market imperfections from a situation withperfect competition (e.g. Chau and de Gorter, 2005; Hennessy, 1998).Generally, land transaction costs related to land withdrawal fromcorporate farms in transition countries do not affect the overall result thatarea payments increase land rents and benefit landowners instead offarmers (Ciaian and Swinnen, 2006). Yet, transaction costs depress landprices both with and without area payments. Transaction costs and areapayments have the opposite effect on land rents. Transaction costs reduceland rents, while area payments are capitalised into land rents. If the effectsare equal then they cancel each other out.Also, credit market imperfections have important implications for thedistribution of area payments (Ciaian and Swinnen, 2009). In a model withland as a fixed factor and credit market imperfections, area paymentsincrease land rents more than subsidies do. On aggregate, farms mayactually lose rather than benefit from the subsidy – only the most creditconstrainedfarms may gain from the subsidy.Land market institutions and regulationsThe effect of subsidies on land value in competitive markets can beinfluenced by land market regulations. The most obvious regulations thatwill affect the land market are those concerning land prices (e.g. fixed) orthat facilitate the prevalence of long-term rental contracts (or both)(Latruffe and Le Mouël, 2006). With fixed land prices and long-term rentalcontracts, one will not observe the capitalisation of subsidies into landvalues, at least not in the short run.Various formal and informal land market institutions will similarlyaffect the subsidy–land value relationship. For example, if a rentalagreement is for a purely ‘cash’ arrangement, then the farm programmepayments must go entirely to the farm operator; the landowner is noteligible to receive any payments. Otherwise, under a share rentalarrangement, the same subsidy payments may have to be divided betweenthe landowner and the tenant. With crop-sharing contracts, the issue ismore complicated if subsidies have to be shared in proportion to cropshares. If the terms of such leases are not adjusted, the landowner will notreap the full benefits. Thus, if subsidy payments increase unexpectedly inthe presence of pre-existing leases, tenants holding a cash rentalarrangement will capture a significant share of the benefits from the