Model of the Impact of Area Payments on the Engagement and Remuneration of Production Factors in Agriculture

Area payments are a key instrument of the European Union’s Common Agricultural Policy. However, their effectiveness as a tool for supporting farmers’ incomes is weakened by the phenomenon of capitalisation. The aim of this study is to identify the mechanism by which area payments stimulate inputs of agriculture production factors and to examine how subsidies granted in the form of area payments are transformed into remuneration for production factors. The research methodology used includes economic modelling and marginal analysis. It is demonstrated that area payments change the allocation of resources compared to the allocation driven by the market mechanism (resulting in a greater engagement of production factors in agricultural production than would be the case in the absence these subsidies) and also affect the level and structure of the remuneration for production factors in agriculture. A theoretical decomposition of the remuneration of production factors into income from non-land production factors and land rent has been carried out.