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Assessing structural change in agriculture with a parametric Markov chain model. Illustrative applications to EU-15 and the USA

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  • Piet, Laurent

Abstract

The Markov chain model (MCM) has become a popular tool in the agricultural economics literature to explain the past evolution of and simulate the future developments in the number and size distribution of farms. In this paper, I show that the way MCMs have been implemented by agricultural economists so far suffers from the fact that transition probabilities are estimated as almost independent variables (up to adding-up to unity constraints). The alternative parametric MCM I propose addresses the deriving issues since (i) it is parsimonious in terms of parameters; (ii) it can be estimated with simple econometric techniques; (iii) it reveals detailed information on the structural change processes at hand. Applying it to experimentally controlled data with noise shows that the proposed model behaves well and competes with the traditional approach without any significant shortcoming. Two illustrative empirical applications, one using data from the EU-15 Farm Accounting Data Network (FADN) and the other using data from the USA Agricultural Resource Management Survey (ARMS), reveal the rich information that can be derived regarding the economic size changes experienced annually by farms in both regions.

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Bibliographic Info

Paper provided by European Association of Agricultural Economists in its series 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland with number 114668.

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Date of creation: 02 Sep 2011
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Handle: RePEc:ags:eaae11:114668

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Keywords: Agribusiness; Farm Management;

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  1. Axel Tonini & Roel Jongeneel, 2009. "The distribution of dairy farm size in Poland: a markov approach based on information theory," Applied Economics, Taylor & Francis Journals, vol. 41(1), pages 55-69.
  2. Karantininis, Kostas, 2001. "Information Based Estimators for the Non-Stationary Transition Probability Matrix: An Application to the Danish Pork Industry," Unit of Economics Working papers 24198, Royal Veterinary and Agricultural University, Food and Resource Economic Institute.
  3. Krenz, Ronald D., 1964. "Projection of Farm Numbers for North Dakota With Markov Chains," Agricultural Economics Research, United States Department of Agriculture, Economic Research Service, issue 3.
  4. Jeffrey M. Gillespie & Joan R. Fulton, 2001. "A Markov chain analysis of the size of hog production firms in the United States," Agribusiness, John Wiley & Sons, Ltd., vol. 17(4), pages 557-570.
  5. Stokes, Jeffrey R., 2006. "Entry, Exit, and Structural Change in Pennsylvania's Dairy Sector," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 35(2), October.
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