How coupled are decoupled payments? An evolving modelling framework for an evolving policy

Abstract

Decoupled payments are the predominant instrument of the Common Agricultural Policy (CAP), both in terms of the number of recipients and share of CAP expenditure. There are theoretically not linked to production and thus should not create incentives to produce. However it remains inconclusive whether these payments are fully decoupled from production or whether they still create incentives to produce via other coupling channels such as land markets, risk, credit constraints, future expectations and labour markets. Based on comprehensive literature review and latest parameter estimates, the aim of this research work is to better understand and quantify the representation (and multiple effects) of European decoupled payments in economic simulation models. A key question to be addressed is by how much does the chosen parametrisation affect models' results? This research work simulates (and compares outcomes of) a set of baseline scenarios covering different representations of decoupled payments within a general equilibrium modelling framework. Decoupled payments are treated either as fully or partially (de)coupled, and are allocated differently to factors based on relevant literature and confidence interval (low, medium and high estimates). Results reveal that a sound understanding and quantification of coupling factor remain critical for any rigorous ex-ante analysis of a complex CAP.