How different types of government payments and the elimination of direct payments affect farm productivity? Evidence from Kansas crop farms

The relationship between total factor productivity (TFP) and different types of government payments is examined using data on Kansas crop farms over the period 2009-2018. Special attention is given to the effect on productivity from the elimination of direct payments in the 2014 Farm Bill. Farm-level TFP is estimated using a variation of the traditional proxy variable approach, assuming the evolution of productivity is not exogenous, but can be influenced by government payments. Results show that alternative types of government payments affect TFP differently. Direct payments were found to have a positive effect on TFP, whereas risk management payments, which replaced direct payments starting in 2015, did not affect TFP significantly. Regarding other types of government payments, only conservation reserve program and state government payments were found to affect TFP (positively and) significantly, but the productivity effect was significantly lower than that of direct payments. Results further show that restricting productivity to be entirely exogenous understates the actual productivity of the sample farms by an average of 8%, implying government payments matter and impact farm productivity.