CAP subsidies, technical efficiency, and its persistence: evidence from Slovenian animal farms

Abstract Improving farm efficiency is central to enhancing productivity, income, and structural transformation in European agriculture. However, inefficiency is often persistent and rooted in structural constraints. This paper examines how the Common Agricultural Policy (CAP) affects technical efficiency and its persistence in animal farming, using Slovenia as a case study. Slovenia provides a relevant empirical setting due to the dominance of small-scale farms, strong reliance on subsidies, and limited economies of scale – characteristics shared by many structurally constrained EU Member States. We apply a Bayesian dynamic stochastic frontier model that jointly accounts for efficiency persistence and technological heterogeneity. Using disaggregated CAP subsidy data, we assess how different policy instruments influence short-run and long-run technical efficiency across heterogeneous farm types. The results reveal four main findings. First, there is strong evidence against a common production frontier, indicating substantial technological heterogeneity among animal farms. Second, the effect of CAP subsidies on short-run technical efficiency depends both on the direction of their impact on efficiency persistence and on the level of technical efficiency in the previous period. Similarly, their impact on long-run technical efficiency is shaped by their effect on persistence and by the level of long-run efficiency. Third, the effects of CAP subsidies are heterogeneous across instruments: investment and other subsidies enhance both short-run and long-run technical efficiency, whereas decoupled payments and agri-environmental subsidies reduce efficiency at both horizons. Fourth, payments for less-favored areas consistently lead to a deterioration in technical efficiency in both the short and the long run.