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In this paper we use a natural experiment to investigate the behavioural response of Irish Cattle farmers to historical policy incentives. In particular we are interested in the period 2001 – 2005 when Less Favoured Area payments were decoupled from production and other subsidy payments available to all farmers remained coupled. The decoupling of the Less Favoured Areas payment provides an exogenous source of variation that gives us unique opportunity for policy evaluation. Researchers rarely observe the effects of a policy change on those affected and those not affected since in almost all cases a policy change affects all. We adopt an ordinal Utility maximization consumer choice framework where individuals make decisions in relation to consumption and leisure. Under our model of utility maximization the expected market gross margin is positively associated with livestock intensity. We identify a non-linear relationship between direct coupled payments and livestock intensity which suggests that high payments incentivise farmers towards extensification. Using a Difference in Difference with propensity score matching we find that there were substantial differences in the behavioural responses of both groups. Farms where payments remained fully coupled adapted their stocking rate decisions in a way that reflects both learning and rationality more significantly than farms where part of their payment was decoupled.


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