Public spending for agricultural risk management: Land use, regional welfare and intra-subsidy substitution

Abstract

This paper analyses the factors influencing public expenditure on the EU’s Risk Management Toolkit comparing six types of regional-level spatial autoregressive models, and finding that there is a predominance of socio-economic factors over risk and agro-ecological factors in the allocation of budget. Higher expenditure occurs in more affluent regions and in areas with clusters of relatively high welfare. Conversely, regions with high agricultural value added and a greater presence of permanent crops spend less on the Risk Management Toolkit, indicating a trade-off with private risk management products (e.g. insurance) and on-farm practices. A higher intensity of CAP subsidies tends to reduce expenditure on the Risk Management Toolkit, indicating that the income stabilization capacity of direct payments might be an alternative to risk management and indicating a substitution between policies. Moreover, a strong spatial dependence of the regional expenditures indicates a key role of the higher-level institutional environment and political economy processes in the allocation of budget. The paper concludes deriving policy implications for the new CAP reform which is characterized by higher flexibility in deciding what policy instruments to implement at the territorial level.