The Effect of Investment and Rural Development Subsidies on the Components of Total Factor Productivity: The Case of Slovenian Farms
The effect of subsidies on the performance of farms has received a great deal of attention in the literature, although results are inconclusive. Further research is required to obtain a better understanding of the connection between subsidies and productivity. Much of the related literature examines the effect of subsidies only on technical efficiency (TE). The objective of this paper is to describe an examination of the effect of different types of subsidies on the different components of total factor productivity (TFP) using insights from stochastic frontier and impact-analysis literature. We first estimate a Random Parameter Stochastic frontier model. Then, based on the estimates of this model, we calculate and decompose the TFP index into TE, scale efficiency, and technological change. Third, we apply combined difference-in-differences and matching estimator to examine the effect of investment, least favoured area (LFA), and agri-environmental subsidies on the different components of TFP. In agreement with most earlier studies, our analysis finds a negative effect of investment subsidies on TE, but this effect on TFP is not significant. This suggests that in addition to TE it is also important to examine the effect of subsidies on TFP and its components. The effect of LFA and agri-environmental subsidies was not significant either on TFP or on its components.