The Capitalization of Agricultural Subsidies into Land Prices

Summary

We review the recent theoretical and empirical literature on the capitalization of agricultural subsidies into land prices. The theoretical literature predicts that agricultural subsidies are capitalized into land prices when land supply is inelastic and land markets function well. The share of capitalized subsidies significantly depends on the implementation of farm subsidies, local land-market institutions, rural market imperfections, and spatial effects.
Most empirical studies have shown that agricultural subsidies are only partially capitalized into land prices, estimating that decoupled payments and
land-based subsidies exhibit higher capitalization than coupled payments
and nonland-based subsidies, respectively. However, estimated capitalization
rates vary widely across studies largely because of data availability and identification challenges.