The importance of accounting for unobserved heterogeneity, state-dependence and differences in residual variances across groups: An application to Irish Farmers land market participation decisions

Stephen O'Neill () and Kevin Hanrahan
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Stephen O'Neill: Department of Economics, National University of Ireland, Galway, Ireland
Kevin Hanrahan: Rural Economy and Development Programme, Teagasc, Athenry, Co. Galway, Ireland

No 1005, Working Papers from Rural Economy and Development Programme,Teagasc

Abstract: Land is an essential input into agricultural production. A grwoing literature is concerned with the factors influencing farmers’ land market participation decisions in developing countries, with developed countries largely ignored. Current best-practise in the land market participation literature is exemplified by Holden et al. (2007) who use a dynamic model which allows for state-dependence and unobserved heterogeneity. Much of the literature fails to adequately deal with these features of land market decisions. In addition, a single model is used to represent all farm types. In this paper, we firstly consider the factors influencing land market participation decisions in a developing country, Ireland, while allowing for state-dependence, unobserved heterogeneity and differences across farm tyes. We compare these results to those that are obtained while ignoring state-dependence, unobserved heterogeneity and differences between farm types. Our results suggest that some caution may be warranted when these aspects are ignored when if fact they are present.

Pages: 32 pages
Date: 2010
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