The Role of Small Farms in Structural Change

This paper explains regionally differentiated patterns of structural change based on a theoretical framework dealing with strategic interaction of farms on the land market. The main research question focuses on the causes of regionally persistent structures. An empirical Markov chain model is defined for the West German agricultural sector. Thereby it is possible to explain the probabilities of farm growth, decline or exit in terms of the current and former regional farm size structure. Further, the impact of variables describing the regional farm structure, thereby indicating market power of the large, the potential of high competition for land within a region and possibly high rents of the status quo in combination with sunk costs, is quantified. The results confirm the relevance of strategic interaction as a crucial determinant of regionally different structural change and persistent regional differences in the farm size structure over time.