Modelling Structural Change in Ex-Ante Policy Impact Analysis

Abstract

Model-based ex-ante policy impact analyses are nowadays widely used in agricultural policy consulting. However, so far very few existing applications try to assess the impact on farm numbers and the reallocation of resources between farms, and due to data availability, these studies generally use normative or ad-hoc decision rules on farm exits. In this paper, we fill this gap, combining an empirically-based estimation of profit-dependent farm exit probabilities with prospective modelling of farm adjustments and selected factor markets. This study combines farm-individual information from farm structural surveys for 1999, 2003 and 2007 and economic information from farm accountancy data for Germany. The estimated model explains farm exit probabilities depending on current and expected future profits, the expected development of competitors (e.g., neighbouring farms competing on the land market), and farm and regional structural characteristics influencing farms' strategic decision making. The econometric exit model is iteratively coupled to a representative farm group model for Germany, facilitating the ex-ante analysis of complex policy reforms. A first application on dairy market reform scenarios highlights the diverging impacts these may have on the developments of the number of dairy farms of different size or regions, and their income and output.