Potential of differentiated payment levels based on standard cost approaches: A case study of selected rural development measures in Germany

Summary

In accordance with EU regulations, payment levels for several measures of rural development programs are calculated on the basis of standard cost approaches, using 'typical’ or average figures for costs incurred and income forgone. Resulting uniform payment rates have been frequently discussed and criticised as being inefficient, having a low cost-effectiveness and generating excessive windfall profits. However, few empirical studies exist which quantitatively examine potentials of a more differentiated standard cost approach. By using German farm accountancy data, this study analyses effects of a payment differentiation according to regional and farm individual characteristics on producer rents, budget expenditures and economic efficiency. Preliminary results show that though overcompensation could be reduced in most cases, savings in budget expenditure are often small and might be even offset by increasing administration costs. Generally our analysis indicates that potential benefits of differentiated standard cost approaches can be partly exploited if a) variances of the cost of participation in the universe of farms are high and the discriminatory natures of differentiation are significant, and b) positive correlations between costs and environmental benefits are strong.