Investing in farming under uncertainty and redistributive support

We develop a real-options model to assess how the post-2023 Common Agricultural Policy (CAP) income support scheme influences landholders’ investment behavior. The reformed CAP increased per-hectare support for small farms through redistributive payments linked to “first hectares”. Small farms respond to higher payments with more aggressive investment strategies. Instead large farms exhibit a nuanced response since higher basic payments encourage investments, but greater redistributive payments lead to more conservative behavior. These dynamics create a “pooling effect”around the farm-size threshold distinguishing large from small farms. Our analysis contributes to the broader debate regarding land value capitalization and CAP’s fiscal implications.