Direct Payments, Spatial Competition, and Farm Survival in Norwayby Hugo Storm, Klaus Mittenzwei, Thomas Heckelei

Am. J. Agr. Econ.

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DIRECTPAYMENTS,SPATIALCOMPETITION,ANDFARM

SURVIVAL INNORWAY

HUGO STORM, KLAUS MITTENZWEI, AND THOMAS HECKELEI

We argue that farm survival is influenced by neighboring farmers’ characteristics and, in particular, by the direct payments neighboring farmers receive. The article shows empirically that these interdependencies are crucial for an assessment of the effects of direct payments on farm survival.

Using spatially explicit farm-level data for nearly all Norwegian farms, a spatial probit model is estimated to explain farm survival from 1999 to 2009 controlling for spatial farm interdependence.

We show that ignoring spatial interdependencies between farms leads to a substantial overestimation of the effects of direct payments on farm survival. To our knowledge, this article is the first attempt to empirically analyze the importance of neighboring interdependencies for the effects of direct payments on farm survival.

Key words: Direct payments, farm structural change, land market, policy assessment, spatial competition.

JEL codes: C21, C25, Q12, Q13.

In Norway, as in many other industrialized countries, direct payments are often legitimized as a way to maintain a vital agricultural sector, and in particular, to prevent the abandonment of farms. It is often argued [e.g., see Breustedt and Glauben (2007) for the EU or Goetz and Debertin (2001) for the

US] that agricultural support increases farms’ profitability and thereby reduces farm exits.

Both of the cited studies analyze the effects of income support on net regional farm exits.

However, these aggregate regional effects

Hugo Storm is a PhD candidate at the Institute for Food and

Resource Economics (ILR) at the University of Bonn; Klaus

Mittenzwei is a research economist at the Norwegian Agricultural Economics Research Institute (NILF) in Oslo; Thomas

Heckelei is a professor of Economic and Agricultural Policy at the ILR. Correspondence may be sent to: hugo.storm@ilr.unibonn.de.

The authors thank two anonymous reviewers and the editor,

James Vercammen, for valuable comments and suggestions that greatly strengthened the article.

The research presented in this article has been financed by the

Research Council of Norway under grant 199349/I10 within the program BIONÆR. Storm received a travel grant from the German Academic Exchange Service (DAAD), which is financed by the Federal Ministry for Economic Cooperation and Development under project ID 56453885. His work is funded by the German Research Foundation (DFG) under grant HE 2854/4-1. Most of the work was conducted while

Storm was a visiting scholar at NILF. The authors are grateful to Grete Stokstad and Svein Olav Krogli from the Norwegian

Forest and Landscape Institute (Skog og Landskap, Ås, Norway) for providing the farm coordinates used in the analysis.

All remaining errors are our own. might mask potentially different reactions at the individual level (Ehrensaft et al. 1984;

Gale 1994). Additionally, regional studies rely on explanatory variables defined at the regional level, which makes their definitions, interpretation, and identification more complicated. With respect to direct payments, for example, one can only identify the aggregated effect of the average payment level in a region on net exits, which likely differs from the individual-level effects.

In contrast, farm-level studies allow direct analyses of the effects of farm characteristics and payments on farm survival; for example, see Key and Roberts (2006), who apply different survival modeling approaches to farm exits. However, to obtain an overall assessment of the effects of payments, the individual farm-level effects need to be aggregated. We argue that this aggregation requires considering the interdependence between farms. As this link is missing in the empirical farm-level studies to date, Roberts and Key (2008) suggest regional studies for policy assessments.

In this article, we aim to explicitly consider these interdependencies in estimation and aggregation of the effects on farm survival induced by a policy change. The objective is to empirically analyze the effect of direct payments on farm exit rates after

Amer. J. Agr. Econ. 97(4): 1192–1205; doi: 10.1093/ajae/aau085

Published online September 23, 2014 © The Author 2014. Published by Oxford University Press on behalf of the Agricultural and Applied Economics

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Storm, Mittenzwei, and Heckelei Direct payments, spatial competition and survival 1193 controlling for spatial farm interdependence using individual farm-level data of nearly all Norwegian farms for 1999 and 2009. It is shown that ignoring the spatial interdependencies between farms in aggregation leads to an overestimation of the effects of direct payments on farm survival due to feedback effects. To our knowledge, this article is the first attempt to empirically analyze the role of neighboring characteristics for an assessment of the effects of direct payments on farm survival.1

In the context of farm structural change, which involves the analysis of farm survival, the importance of neighboring interdependence has long been acknowledged. We use the term “interdependence” to describe any form of direct strategic interactions, indirect effects, or spatial correlations in the environment in which the farm operates. Particularly, in the agent-based models literature of regional farm populations, the importance of land immobility, the location of farms in space, and the interdependence of farms via competition on the spatial land market is recognized (Balmann 1997; Balmann et al. 2006; Happe, Kellermann, and Balmann 2006; Happe et al. 2008; Freeman, Nolan, and

Schoney 2009). However, econometric studies concerned with spatial interdependence in farm structural change are rare. Although

Huettel and Margarian (2009) consider different theoretical frameworks of strategic competition on the land market, they do not empirically model the interdependence between farms when analyzing the impact of current and past regional farm structures on farm structural change. Weiss (1999) is aware of the importance of farm interdependence and the competition for land and labor, but he does not consider them in his empirical analysis of farm survival and farm growth in