Abstract
This study investigates the effect of subsidies on the efficiency of farms in Kosovo using the Stochastic Frontier Analysis (SFA) approach. The research is motivated by the on-going debate on whether subsidies improve farm productivity or reduce incentives for efficiency, particularly in post-transition economies. The analysis is based on a nationally representative sample of 1,250 farms for the year 2019, obtained from the Kosovo Farm Accountancy Data Network (FADN). A translog production function is estimated with inputs of land, labour, capital, and intermediate consumption. Technical efficiency is then derived from the stochastic frontier model, and farm-level determinants of inefficiency, including subsidies, are examined. Results indicate that the average technical efficiency of farms in Kosovo is about 72.5%, suggesting considerable potential for productivity growth. Importantly, the findings reveal that subsidies, measured as the ratio of total subsidies to total output, exert a significant negative effect on efficiency. This result suggests that subsidies, in their current form, may discourage resource optimization and innovation. Comparative evidence with other Central and Eastern European (CEE) countries highlights that Kosovo’s efficiency level lies within the regional range, but the inefficiency effect of subsidies is consistent with several CEE studies. The study concludes with policy recommendations, emphasizing the need for restructured subsidy schemes that target productivityenhancing investments and technical support to farmers. Limitations and directions for future research are also outlined.
Keywords: CEE Countries, Farm, Kosovo SFA, Subsidies, Technical Efficiency.