External finance and agricultural productivity growth

Abstract

AbstractWe propose a new method to estimate the impact of external finance on productivity. Using a nested constant elasticity of substitution production function, finance has an indirect influence on productivity through its effect on capital augmenting‐technological change and depends on the elasticity of substitution between equity and debt, as well as on the quantity and price of external finance and net value added. We develop and test a theoretical model using Farm Accountancy Data Network regional data covering all EU Member States and different subsamples by EU regions, size of farms, and farm types. In the 2004–2018 period, land, labor, and capital complemented each other but had a decreasing or stagnating productivity, reaffirming the importance of external finance to improve productivity. Results suggest that external finance and productivity follow an inverted U‐shaped curve, with a positive impact on less capitalized farms with lower debt‐to‐equity ratios, while capital‐intensive farms are not benefiting from excess finance. Rethinking the general assumption that agricultural growth has a positive and linear effect with access to credit lead to different strategies in the use of external finance. [EconLit Citations: G30, O16, O33, Q14].