Does Farm Size Really Converge? The Role of Unobserved Farm Efficiency
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We analyze the growth of family farms in Israeli cooperative villages between 1981
and 1995, using longitudinal data. We use instrumental variables to account for the
endogeneity of initial farm size, and correct for selectivity due to farm survival. We
also include a technical efficiency index, derived from the estimation of a stochastic
frontier production model, as an explanatory variable. We find that technical
efficiency is an important determinant of farm growth, and that not controlling for
technical efficiency could seriously bias the results. The size distribution of Israeli
family farms is found to be mostly diverging, while without technical efficiency farm
growth seemed to be predominantly random.