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Abstract
In this paper we estimate the impact the CAP subsidies on farm bank loans. According to
the theoretical results, if subsidies are paid at the beginning of the growing season they
may reduce bank loans, whereas if they are paid at the end of the season they increase
bank loans, but these results are conditional on whether farms are credit constrained and
on the relative cost of internal and external financing. In empirical analysis we use the
FADN farm level panel data to test the theoretical predictions for period 1995-2007. We
employ the fixed effects and GMM models to estimate the impact of subsidies on farm
loans. The estimated results suggest that (i) subsidies influence farm loans and the effects
tend to be non-linear and indirect; (ii) both coupled and decoupled subsidies stimulate
long-term farm loans, but the long-term loans of big farms increase more than those of
small farms due to decoupled subsidies; (iii) the short-term loans are affected only by
decoupled subsidies, and they are altered by decoupled subsidies more for small farms
than for large farms; however (v) when controlling for the endogeneity, only the
decoupled payments affect loans and the relationship is non-linear.