The Effect of Investment, LFA and Agri‐environmental Subsidies on the Components of Total Factor Productivity: The Case of Slovenian Farms

Abstract

AbstractThe effect of subsidies on the performance of farms has received a great deal of attention in the literature, although results are inconclusive. Furthermore, much of the related literature examines the effect of subsidies only on technical efficiency (TE). We examine the effect of different types of subsidies on the different components of total factor productivity (TFP) in Slovenian agriculture over the period 2006–2013. We first estimate a Random Parameter Stochastic production frontier model. Then, based on the estimates of this model, we calculate and decompose the TFP index into TE, scale efficiency and technological change. Third, we apply combined difference‐in‐difference and a matching estimator to examine the effect of investment, less favoured area (LFA) and agri‐environmental (AE) subsidies on the different components of TFP. In our case, these subsidies are found to have no significant effect on either TFP or on its components.