Abstract
The South Korean government provides large amounts of its total agricultural budget on direct payments to increase farm productivity due to the importance of the agricultural sector in South Korea. Providing direct payments can positively influence farm productivity by liquidating farm credit in input markets, while it can negatively affect farm productivity by distorting farmers’ behaviors. Therefore, it is necessary to rigorously assess the effect of direct payments on productivity. This study investigated the impact of direct payments on farm productivity with a better estimation strategy, using a farm-level panel dataset from the Korean Farm Household Economy Survey. We first derived an individual farm-level productivity measure using a control function approach. We then estimated the effect of direct payments on farm productivity using the propensity score matching method. Our results showed that direct payments were associated with an increase in agricultural productivity by about 12 percent on average. The results imply that direct payments play an important role in farm production. Given that the South Korean government is currently revising the direct-payment system, our results have implications for the design of the new direct-payment system and deserve attention from policy makers.
Highlights
Agriculture plays a crucial role in the production of essential food products and is the source of livelihood of many people by providing employment opportunities
This paper explores the impact of direct payments on agricultural productivity by focusing on South Korean farms
We used the control function approach proposed by Levinsohn and Petrin [23] to estimate a production function and to obtain farm-specific, time-varying total factor productivity
Summary
Agriculture plays a crucial role in the production of essential food products and is the source of livelihood of many people by providing employment opportunities. The South Korean government spent about 18 percent of its total agricultural budget on direct payments in 2018 (The rest of the total agricultural budget is used for farm-management stability such as insurance, grain management, and farm-production management such as water management, rural welfare, and development). This indicates that direct payments are an important policy for sustainable agricultural production in South Korea
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