Cap reform: modelling supply response subject to the land set-aside
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This paper uses duality theory to develop a model of European Community agriculture. The model is used to investigate the impact of
the land set-aside provision of the recent package of reforms of the Common Agricultural Policy. We assume that producers chose output
and variable input levels that maximize difference between revenue and variable cost. By including first-order conditions for the allocation
of land across its uses, we impose that the observed allocations are profit-maximizing allocations. To overcome the problem of incorporating
many outputs into an estimable production structure, we imposed a priori the restriction that the technology was weakly separable in major
categories of outputs. With this restriction, it was possible to model production decisions in stages using consistent aggregates in the latter
stages.