Abstract
This paper provides an ex ante assessment of the effects of the Income Stabilization Tool (IST), a new risk management tool proposed in the Common Agricultural Policy of the European Union. We investigate the effects of IST on income variability and levels as well as on income inequality in the farming population. We take Italian agriculture as an example as the introduction of IST is currently under discussion there. A rich panel of 2777 farms was studied over a period of 7 years. We use stochastic simulation to derive different income inequality estimates and apply Gini decomposition approaches to assess the distributional implications of IST. We compare the current income situation with that resulting from a hypothetical implementation of IST under different policy scenarios, also accounting for reduced levels of CAP direct payments. We find that IST not only stabilizes farm income but also enhances its level and reduces income inequality in Italian agriculture. IST is more effective in reducing income inequality when farmers pay contributions to mutual funds that are proportional to their income compared to the case of flat rate contributions. Finally, results do not support the hypothesis that the impact of IST will differ if the level of direct payments were to be reduced. Thus, results seem robust enough to accommodate future policy conditions.
Highlights
Current and future developments foreseen by the Common Agricultural Policy of the European Union (CAP) point in several directions, comprising (1) a shift towards more targeted and tailored payments, with particular emphasis on improving provision of a wide range of ecosystem services; (2) a reduction of support based on direct payments1; and (3) increasing support of market-based instruments to cope with the high and growing risk exposure of farms (e.g., Bureau et al, 2013, Galán-Martín et al, 2015, Meuwissen et al, 2018, Fresco and Poppe, 2016)
A constant sample is needed because the analysis of the variability of farm income must be based on data referring to a relatively long period of time 15Basic statistics of the farm sample are reported in the Appendix, Table 6. 16Available at: http://ec.europa.eu/eurostat/web/hicp/data/database
Income levels, and income distribution using the example of Italian agriculture
Summary
Current and future developments foreseen by the Common Agricultural Policy of the European Union (CAP) point in several directions, comprising (1) a shift towards more targeted and tailored payments, with particular emphasis on improving provision of a wide range of ecosystem services; (2) a reduction of support based on direct payments; and (3) increasing support of market-based instruments to cope with the high and growing risk exposure of farms (e.g., Bureau et al, 2013, Galán-Martín et al, 2015, Meuwissen et al, 2018, Fresco and Poppe, 2016) Regarding the latter, the EU Rural Development Policy provides financial contributions (Bardaji and Garrido, 2016): to Severini et al Agricultural and Food Economics (2019) 7:23 premiums for insurance against economic losses to farmers, to mutual funds to pay financial compensations to farmers for economic losses, and to mutual funds managing an Income Stabilization Tool (IST) providing compensation to farmers for a severe drop in their income. Mutual funds restricted to farmers belonging on a specific sector and/or region may have the advantage reduce moral hazard problems because a less asymmetric distribution of information (Trestini and Giampietri, 2018)
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