Soft Budget Constraints and Investment Support in Estonian Agriculture

Abstract

The article discusses the question of the financial constraints in Estonian dairy and crop farms in the transition period, and there are also identified the farms that have been mostly affected by these imperfections. For that, an investment accelerator model augmented with a cash flow variable was used. The empirical analysis is based on the unbalanced panel data containing 2263 dairy and 1762 crop farms in the period between 2000 and 2014. We have three periods of 5 years each: 2000-2004 (the pre-EU accession), 2005-2009 (being an EU member before the economic crisis), 2010-2014 (after the economic crisis). We used these periods to construct the fixed effect and random effect models for different types of farm: dairy and crop farms. In addition to the full sample estimate, we use farms characteristics to classify crop farms by area, and dairy farms by the average number of cows per year. The estimations of the standard augmented model obtained by different econometric methods for several subsamples have revealed a dissimilar level of the financial constraints. The obtained results clearly imply that the farm investment behavior is driven by the competitive output market conditions and the farm abilities to sell output and invest in such a market environment. Moreover, except for all farms farm the gross investment is positively and significantly associated with the cash flow, confirming for any farms the absence of the soft budget constraints for the farms. The results confirm that the financial variables significantly influence the farms’ investment subsidy, providing an empirical evidence of an imperfect capital market in the Estonian agriculture.