The Measurement of On-Farm Diversification Abstract to be continued

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1 The Measurement of On-Farm Dversfcaton By Gemma Francès*, Ian Layton**, Jord Rosell*, Erk Sondell** and Lourdes Vladomu* Those that wrte ths artcle* ** Department Economa Aplcada, Unverstat Autonoma de Barcelona, Span. ** Centre for Regonal Scence, Umeå Unversty, Sweden. Paper presented at the 40th Congress of the European Regonal Scence Assocaton, European Monetary Unon and Regonal Polcy, Barcelona, 29 th August 1 st September Abstract European agrculture s undergong major processes of change. Globalsaton, competton, enlargement of farms, modfed support levels and EU expanson are just some of the many factors that have affected and wll contnue to affect the structure. Over recent decades a process of specalsaton has been takng place wthn agrculture. More and more farmers are specalsng and ncreasng ther scales of operaton. Smultaneously, there have been large reductons n the number of farmers as well as n the rural populaton as a whole. Dversfcaton offers an alternatve busness strategy to specalsaton. Ths paper develops a method for measurng the mportance that on-farm dversfcaton has for farm households n a varety of European rural areas. The model analyses dfferent characterstcs that affect dversfcaton as well as elements that determne the proftablty of on-farm dversfcaton..to be contnued.

2 1. Introducton Future rural development wll be hghly dependent on the ablty among the rural populaton to establsh and run new enterprses. However, not all people have the ablty to become entrepreneurs. Future frm development s more lkely to derve from exstng frms and from famles that already run companes. The most common rural busness entty s the agrcultural frm,.e. the farm. The number of European farmers has decreased durng the last decades. Increased competton, ratonalsaton, large-scale specalsed farmng, changes n the envronmental rules and the decreased number of successors from the generaton shfts have resulted n a large reducton n the number of farmers. The remanng farms are ncreasng n sze and scale. There s an urgent need to fnd new busness deas for those farms that cannot compete n the specalsaton and enlargement process. One alternatve opton for such farmers could be to dversfy ther farm-based actvtes. Local farmng s also affected by a number of factors nfluencng European agrcultural development n general. Examples of these factors nclude globalsaton, ncreased consumer demand, EU enlargement, and ncreased envronmental concern. Through the Agenda 2000 reforms the EU has changed the drecton of ts rural development ambtons wthn the Common Agrcultural Polcy. The new polcy ams to create precondtons for the sustanable development of rural areas, for example, by mantanng and creatng employment. The EU has motvated ths by adoptng the followng prncples: The multfunctonalty of agrculture,.e. ts vared role over and above the producton of foodstuffs. Ths mples the recognton and encouragement of the range of servces provded by farmers. A multsectoral and ntegrated approach to the rural economy n order to dversfy actvtes, create new sources of ncome and employment and protect the rural hertage. Flexble ads for rural development, based on subsdarty and promotng decentralsaton, consultaton at regonal, local and partnershp level.

3 Transparency n drawng up and managng programmes, based on smplfed and more accessble legslaton. 1 For the development of rural areas on-farm dversfcaton s nterestng for several reasons. For example, from an EU perspectve t becomes pertnent because of the wdespread nterest n rural development, the EU enlargement process, the future reducton of agrcultural support, and concern for the vablty and survval of European farm busnesses. From a natonal perspectve t s nterestng because of the rural development, the loss of the role of the agraran sector as a motor of rural development, problems wth depopulated rural areas, and employment problems for people leavng farmng. From a rural development perspectve, t s nterestng because of the employment opportuntes that on farm dversfcaton could generate n rural areas, especally as farms are the most common type of frms n the rural areas. From the farmng and agrcultural perspectve, dversfcaton s nterestng as a possble opportunty for farmers that cannot, or wll not, enlarge and/or specalse. Dversfcaton could be a very mportant opton for the survval of farms n all European Countres. From ths respect t s nterestng to study on-farm dversfcaton n Europe. We are therefore nvolved n the collaboratve research project Innovaton, Dversfcaton and European Agrcultural Stuatons (IDEAS) 2 The IDEAS-project has three man research objectves: (1) to dentfy dynamc examples of nnovatve sgnfcant on-farm dversfcaton n four EU member states (England, France, Span and Sweden) wth emphass on employment opportunty creaton and the qualtatve nature of that employment; (2) to select a varety of localtes wthn four major agrcultural regons of Northern and Southern Europe n order to analyse how nnovatve, sgnfcant forms of on-farm dversfcaton are ncorporated wthn the sute of exstng on-farm actvtes; and (3) to evaluate how nnovatve forms of dversfcaton have been sustaned n these IDEAS s funded by the Fourth Framework Programme of the European Commsson (FAIR6- CT ). The followng scentsts are nvolved n the project: Julan Clark and Alun Jones (, Unversty College London), Germana Baudn, Glles Bazn, Jacques Blanchet, Alan Revel, Bernard Roux and Hervé Vanoverschelde (INRA -, Insttut natonal agronomque Pars- Grgnon), Gemma Francès Jord Rosell and Lourdes Vladomu (, Unverstat Autonoma de Barcelona), Ian Layton, Erk Sondell and Ulf Wberg (, Umeå Unversty).

4 localtes and, n partcular, how local/regonal nsttutons and key poltcal actors have nterfaced wth farmers n ther support of nnovatve on-farm dversfcaton. In the project, there wll be ntervews wth 125 farmers n each study regon. We are usng a questonnare for the ntervews, whch ncludes both open and closed questons. The questonnare contans about 100 questons. The questonnare was constructed usng the project s ntal research questons, whch are: What are the factors that have a postve effect on the rse of on-farm dversfcaton nnovatve experences? What makes these dversfcaton ntatves nnovatve? Whch are the nnovaton actvtes n agrcultural dversfcaton? What are the sgnfcance of networks, polces, type of farm household (sze, age), type of farms, etc.? How have the nnovatons been supported by publc and prvate agences? How are nnovatons n agrcultural dversfcaton sustaned? How have nnovatve forms of dversfcaton been sustaned? How are nnovatve sgnfcant forms of on-farm dversfcaton ncorporated wthn the sute of exstng on-farm actvtes (adjustment)? How have local/regonal nsttutons and key poltcal actors nterfaced wth farmers n ther support of nnovatve on-farm dversfcaton? What are the man consequences of nnovatve on-farm dversfcaton n terms of agrcultural actvty and rural development? Whch are the man polcy recommendatons? Ths paper s about the measurement of on-farm dversfcaton. The purpose s to develop a method for measurng on-farm dversfcaton usng the data we have collected through ntervews wth farmers n the four study regons. The paper conssts on fve sectons. After ths ntroducton -secton 1-, a conceptual approach about the defnton and the determnants of on-farm dversfcaton are developed. Followng n secton 3, we proceed wth the measurement of on-farm dversfcaton. To ths end, frstly we determne the varables consdered n the model and ntroduce some concepts for the measurement; secondly, we develop ndcators from the many varables nvestgated n order to measure on-farm dversfcaton; and, thrdly, we develop an econometrc model. The fnal secton concludes the paper wth a summary of what we hope to acheve wth ths method.

5 2. Conceptual approach to on-farm dversfcaton 2.1. The defnton of on-farm dversfcaton. In the IDEAS project we defne on-farm dversfcaton as envronmentally-frendly complementary on farm actvtes that provde sgnfcant employment opportuntes not only on the farmstead, but also upstream and downstream of t. 3 Ths s a very broad defnton and on-farm dversfcaton can therefore contan a wde varety of actvtes such as new agrcultural products (e.g. bomass, producton of local lvestock breeds/plants), new producton processes (e.g. low-nput farmng practces), new market behavours (e.g. drect marketng, ncreased demand for specalst crops, or nche products), use of new raw materals (e.g. use of new prophylactc crop treatments), a new form of farm busness organsaton (e.g. partnershps, collectves, and group farmng), or new non- or sem-agrcultural products or servces (e.g. manufacture, agrotoursm, gross or retal sales). It s necessary to establsh some operatve delmtatons to the concept of dversfcaton, n order to determne what knds of actvtes are ncluded or excluded. The frst delmtaton s between on-farm and off-farm dversfcaton. On-farm dversfcaton means that the new, or changed, actvtes are based on the farm, for example a shop located on the farm premses. Off-farm dversfcaton means actvtes that are run and located outsde the farm, for example a shop n a nearby town. Another delmtaton s between nnovatve and non-nnovatve on-farm dversfcaton, whch s charactersed by ts conceptualsaton as a knowledge and resource-based process wth the redeployment of factors and knowledge of producton n farm busnesses as a means of achevng new goals, enablng farm busnesses to poston themselves on new soco-economc trajectores. 4 Examples of nnovatve on-farm dversfcaton could be farmers that develop (even nvent) a completely new actvty (a product or a servce) or farmers that are the frst to start up a new actvty n a regon. 3 From the techncal annex of the IDEAS research proposal. 4 Ibd.

6 Non-nnovatve on-farm dversfcaton conssts of actvtes whch could be for example tradtonal or coped from other local farmers. The thrd delmtaton s between sgnfcant and non-sgnfcant on-farm dversfcaton, where the former s charactersed by New actvtes whch are generated by farmers/farm household members and whch have a major bearng upon the organsatonal/producton profle of the farm as a household/busness. 5 The sgnfcance could, for example, be measured n terms of employment creaton and/or ncome contrbuton and/or work creaton. Less sgnfcant dversfcaton would then be actvtes that do not lead to hgher levels of employment, work or ncome. Regardng the problem formulaton n measurng on-farm dversfcaton (nnovatve or non-nnovatve, sgnfcant or non-sgnfcant), one has to decde what to measure and how. In ths sense t s mportant to buld ndcators from the varables and then make some classfcaton n order to measure dversfcaton. Ths wll be done n the followng sectons. The project s objectve and our research questons provde the startng pont for the creaton of ndcators. We beleve that these conceptual delmtatons for on-farm dversfcaton could prove very useful for ganng a better understandng of the mpact that dversfcaton has on the agraran household, as well as n rural areas The factors that determne the development of on-farm dversfcaton Here we ntroduce some factors that we beleve affect the orgn and growth of on-farm dversfcaton (see fgure 1). Both nternal factors wthn the farm household Eexternal factors (nsttutons, legslaton, poltcs and market) as well as nternal factors wthn the farm household can affect the precondtons for dversfcaton. Far from beng mutually exclusve, the fgure s sx nternal factors tend to overlap and must be perceved as nteractng closely wth one another. The famly factor conssts of varables related to the farm household(s) lvng on the farm, such as age, sze, educatonal level, off-farm work, etc. The farm factor comprses, for example, the land area, qualty and land use (arable, meadow, pasture, forest), the type of enterprse, the type of producton, etc. The 5 Sx month report.

7 geographcal factor ncludes the locaton of the farm and the localsed embeddedness of the farm household. The economc factor conssts of the farmer s nvested captal, the turnover, the loans, entrepreneurshp, etc. The nnovaton factor s the ablty among the farm household to create or adopt new deas/actvtes. Lastly, tthe nsttutonal factor ncludes, for example, the farmer s use ofuse of advsory nsttutons and fnancal ad. External factors Famly Farm Innovaton Internal DIVERSIFICATION factors Geographcal Insttutonal Economc

8 Famly External factors Farm Economc Dversfcaton Geographcal Innovatonl Insttutonal Fgure 1 Conceptual model of factors that have mpact on dversfcaton. (We are workng on a better llustraton here!) The farm household works n a spatal envronment where the farm nteracts wth the local, regonal, natonal and nternatonal arenas, the market, the local/regonal nsttutons and key poltcal actors. Hence, network aspects such as locaton and nterface are also mportant factors for the output of dversfcaton. The farm household arena s shown n fgure 2. Poltcs nterface wth all levels of arena va such polcy measures as agrcultural support, tax regulatons, specal prce supports, transport subsdes and varous other forms of fnancal support. The analyss of how the farm busness adjusts n order to sustan dversfcaton actvtes can therefore be made n a spatal context. For example, both the ncorporaton of dversfed actvty nto the exstng on-farm actvtes and the sustanment of nnovatve forms of dversfcaton depend on several nteractons wthn the structure of the farm, the local arena precondtons, the market possbltes, and the nterface wth local/regonal nsttutons and key poltcal actors.

9 P oltcs Local/regonal n sttu ton s Farm household M a r k e t Local arena Regonal/natonal/ nternatonal aren a Fgure 2 The arena for farm dversfcaton. 3. The measurement of on-farm dversfcaton In order tin order too measure on-farm dversfcaton t s necessary to decde exactly what shouldall be measured and how. In general terms we want to measure the mportance that on-farm dversfcaton has on the households of the dfferent study areas. Under the vson of ntegrated rural development, the household s not only nterpretated as a productve unt. The household s regardedseen as an element that s related to and ntegrated wth the soco-economc, culturtal and envronmental contexts. From ths pont of vew, as we menton above (secton 2.2.), the on-farm dversfcaton process depends on the soco-economc character of the farm, the nsttutonal support, the geographcal context and the economc stuaton nof the area - regon - where the farm s located.

10 To know fnd the relevance that on-farm dversfcaton process has foron the household, frstly we frst have to determne the varables that needare to be consderedng wthng each nternal and external allfactors that determne nfluence the development of on-farm dversfcaton. For the purpose of measurement, these varables need to be quantfed and ths wll be done through the creaton of ndcators later n the project. 3.1 Factors varables 3.1 Factor varables The Soco-economc Context of the Farm As mentoned before, from the farmng and agrcultural perspectve on-farm dversfcaton s nterestng as a possble opton for the survval of farms. Under ths pont of vew, t s necessary to consder those elements drectly lnked wth the farm such as the famly, physcal and economc farm factors. Famly varables show the famly structure of the farm. The number of members, ther ages, educaton and successor can gve some dea of the level of motvaton and dynamsm wthn the households. Off-farm actvtes can be regarded as postve elements n the process of on-farm dversfcaton, because they can contrbute towards mantanng the vablty of the farms and provde a fnancal source for on-farm dversfcaton. On the other hand, the transfer of famly workforce from on-farm to offfarm actvtes can have a negatve bearng on the process of on-farm dversfcaton and, fnally, on the survval of the farm and the rural landscape. We consder the presence of newcomers to rural areas because t can have opposte effects on the process of on-farm dversfcaton. On one hand, the arrval of newcomers contrbute postvely to the dynamsm of rural areas n terms of mprovng populaton and economc trends (ncreasng populaton, rejuvenaton of ageng populaton tendency,

11 generaton of economc actvtes, ncreasng demand of new servces, etc) and also transferrng new sklls and knowledge to the agraran actvty (new technques of agrcultural croppng or husbandry, new types of contractng new ways of of marketng commercalsaton, etc). On the other hand, the presence of newcomers can generate some socal conflct wth the natve populaton that can hnder the process of on-farm dversfcaton. Together wth the famly varables, physcal and economcal farm varables are also essental to determne and measure the mpact of on-farm dversfcaton. We have consdered several physcal varables such as the sze, the economc turnover, tenure, farm enterprse type, and rrgaton (to dfferentate ts mpacts n terms of proftablty n comparson to non-rrgated land). Fnally, we consder the seasonal nature of agraran actvty as a varable that can contrbute to the process of on-farm dversfcaton. Among the economc farm varables we consder those related to employment, ncome and nvestment. Insttutonal and Economc contexts In order to analyse the mpact of the nsttutonal and poltcal context n on-farm dversfcaton, t s necessary to consder several varables. The exstence of means of support at EU, natonal or regonal level and the use of these by the farmers gves rse to the dea of attemptng to measure the dynamsm and effectveness of farmers n utlsng such ads. In certan cases co-operatves or ther unons contrbute to new strateges as well as extenson groups. On the other hand, the exstence of networks has an mportant effect on reducng the problems of solaton that are very common n rural areas. Networkng provdes the framework for the crculaton of nformaton (formal and nformal), for the exchange of experences and techncal assstance, and for creatng and boostng synerges among rural areas. Assocatons can play also an mportant role n fosterng the on-farm dversfcaton process. All these questons fgure as varables n order to dscover whether or not networkng and assocatons are sgnfcant and postve to on-farm dversfcaton.

12 Macroeconomc Context Economc cycles have a relevant nfluence on the development of economc actvty and, by extenson, on the on-farm dversfcaton process. It therefore becomes necessary to consder certan macroeconomc varables such as unemployment rate, partcpaton rate and ncome per capta, n order to analyse the extent of the effects of the macroeconomc envronment on the on-farm dversfcaton process. Geographcal context to the Farm Most rural areas are facng some form of geographcal constrant. Perpheral stuatons n conjuncton wth the process of modernzaton have resulted n a vcous crcle n the less favoured areas. Geographcal constrants have generated problems of solaton that tend to lead to processes of depopulaton and the ageng of populaton. In turn, these processes have an mpact on the lack of servces and so on. On the other hand, geographcal or physcal elements can also contrbute postvely to the development of some economc actvty and ncreasng the ncome earned outsde agrculture, through the developng a range of "green" actvtes that also, contrbute to enhance the natural and cultural hertage Buldng an approprate typology of on-farm dversfcaton We have receved your draft about the typology. We want to see carefully The typology must follow the scheme made by Alan Revel n Pars (see the photocopy). Revel s typology may be the best one, but we could consder other optons, se below Dversfcaton s defned as the sum of new productons, technques or actvtes wthn the same agrcultural enterprse. Wthn ths wdely defnton t s necessary to establsh a

13 typology of the ways of practsng on-farm actvtes n order to measure and specfy the mpact on the household's proftablty. On the other hand, the same on-farm dversfcaton actvtes may be nterpreted dfferently n the dfferent countres studed. Households n the European Unon countres are strongly marked by ther hstory, ther economc and socal envronment and ther nsttutonal framework. As some studes have ponted out (Bowler, I.; 1999), the most sutable choce of on-farm dversfcaton actvtes can vary among each country. We proceed to establsh the followng typology of on-farm actvtes: A) Agrcultural producton dversfcaton: that ncludes on one hand, new types of agrcultural products such as non-tradtonal farm crops and lvestock, agro-forestry, fsh farmng and apculture. B) Increasng the agrcultural value-added and agrcultural servces and agraran valorsaton of the farm assets. In ths secton we nclude that actvtes that contrbute to ncrease the valorsaton of the agraran products such as on-processng crops and lvestock; drect marketng of farm products, contractng agraran machnes, agrcultural servces or leasng of land or buldngs for agrcultural purposes. C) Non- agrcultural servces: that ncludes those actvtes non related drectly wth the prmary sector such as toursm and recreatonal actvtes; landscape protecton and envronmental actvtes; handcrafts manufacture and professonal servces. D) New methods of producton, new technologes: ncludng nnovatve type of producton such as organc farmng and ntegrated crop management; agrenvronment practces (no tllage, etc); new seeds ( GMO - genetc modfcaton) and those actvtes related to the applcaton of new technologes (telework and other actvtes based on new technologes or communcatons).

14 4. The model: varables to consder and statstcal treatment. Startng from the nsttutonal an non-nsttutonal lterature whch pont out that dversfcaton can contrbute to the survval of the farm and to reduce the tradtonal problems wch face rural areas, we propose a theoretcal model of measurement on-farm dversfcaton. The objectve s to valorate the relevance that on farm dversfcaton has on the survval of the farm n other words, the mpact that on-farm dversfcaton has on the proftablty of the households. To ths end, we propose the followng theoretcal model to evaluate the effects of dversfcaton decson. The null hypothess s that on-farm dversfcaton contrbutes sgnfcantly to ncreasng the household's profts. The model contrasts the sgnfcance that dversfcaton has on the ncrease of proftablty. Frst of all, we have to determne whch elements contrbute to the decson to dversfy, and secondly, once the farmer dversfes, what s the ntensty of dversfcaton. Dversfcaton cannot be estmated drectly. We have to use some ndcators as a proxy of these meanng. In that sense we use two ndcators: A. Dversfcaton as a % of tme devoted to on-farm dversfcaton n relaton to the total of workng tme n the farm. Dependent varable, L. B. Dversfcaton as a % of on-farm dversfed actvtes ncome. Dependent varable, Y. We wll estmate both ndcators and then compare the results between them. 4.1 Theoretcal Model Under the assumpton that a household has n possble actvtes of dversfcaton, the decson to dversfy wll be made when the net global proftablty of dversfcaton s

15 postve and, also, when the total proftablty of the household after dversfcaton s bgger than when the farmer does not dversfy. Hence the prospectve profts from dversfyng can be estmated by comparng the value added generated by those who dversfy and those who do not dversfy. The dversfcaton proftablty rate s the varable we use to compare the ncome or value added that the household obtan n the two schemes, that are, dversfcaton and non dversfcaton. The proftablty of dversfcaton depends drectly on the characterstcs of the household (defned n secton 3.1). It s possble that two households wth the same dversfcaton actvtes, but wth dfferent characterstcs (C), have dfferent proftablty rates. In concluson, the proftablty of dversfcaton for each actvty that can be carred out n the household depends drectly on the Matrx C. Thus, what we determne s whch are the most sgnfcant characterstcs that contrbute postvely to the dversfcaton decson. These characterstcs are the elements that determne the proftablty of onfarm dversfcaton. Now we proceed to model the dversfcaton decson, startng from the mcroeconomc modellng of net expected proft of the household. The methodology of the theoretcal model presents the followng stages: To smplfy the model we assume that there are only two on-farm dversfcaton actvtes (a,b) 6 Consder Y a (d) and Y b (d) are the ncome or value added generated on the household by the on-farm dversfcaton actvtes (a,b respectvely), where d reflects the % of tme devoted to on-farm dversfcaton n relaton to the total workng tme n the farm or the % of on-farm dversfed actvtes ncome: Y a (D) = (1 +σ a ) D + Y 0 - D = σ a D + Y 0

16 Y b (D) = (1 +σ b ) D + Y 0 - D = σ b D + Y 0 In whch σ a and σ b s the net return obtaned wth probabltes π and 1-π respectvelly of on-farm dversfcaton actvtes, a and b. Accordng to ths modellng, the net expected proft of the household depends on D. ~ B n ( D) b( D) = =1 π (1) where n = 2 Includng the values of Y a (D) and Y b (D) n the expresson (1), t can be expressed n the form: ~ B ( Y ) + ( π ) b( Y ( D ) a b ( D) πb ( D) The household faces up to a problem of expected proft maxmzaton. ~ Max d B = 1 ( D) subject to the followng constrants: Assume one on-farm dversfcaton actvty (a) has a postve return and the other (b) has a negatve return. The problem s to determne the decson of on-farm dversfcaton and ts optmum amount. D restrctons We assume that dversfcaton can not take a negatve value: D 0 Returns restrccons: 6 The assumpton of two actvtes does not affect the results n the case of ncreasng to n onfarm dversfcaton actvtes.

17 We assume that σ a > 0 and σ b < 0, expectng net returns of on-farm dversfcaton s: ( 1 π ) σ 0 ~ σ π + > σ = a b Addtonally, we suppose that ths return s postve because on the contrary the farmer would not dversfy. The decson varable s D and t s assumed that: Y a ( D ) > Y ( D ) 0 b We want to obtan a value of D, such that ~ Y0 0 D D = σ b > Y 0 s (-σ b ) < 1 < Y 0 s (-σ b ) > 1 The household decdes to dversfy when the global expected net return s postve, The maxmsaton problem s: ~ Max B d So that, ( D) = Max πb( Y ( D) ) + ( 1 π ) b( Y ( D ) b a b Y a (D) = (1 +σ a ) D + Y 0 - D = σ a D+ Y 0 Y b (D) = (1 +σ b ) D + Y 0 - D = σ b D+ Y 0 Subject to the followng restrcton: ~ Y0 0 D D = σ b As B (D) s a contnous functon defned on a compact set, so that, t has a maxmum and a mnmum pont. So, there s a soluton D* > 0. The optmum soluton to the maxmzaton problem has to verfy that: ~ B = πσ a b' ( σ a D + Y ) ( 1 ) bb' ( b D Y ) B ~ 0 + π σ σ + 0 = '( D) D

18 When there s no dversfcaton, the prevous expresson s gven by: ~ B 0 = πσ b' Y + 1 π σ b' Y = πσ + 1 π σ b' Y ( ) ( ) ( ) ( ) ( ( ) ) ( ) 0 a 0 b 0 a b 0 > As b s an ncreasng functon, the prevous expresson s bgger than zero. So that, D = 0 s not the optmum soluton, t gves the return's threshold. The household's members decde not to dversfy below ths return's threshold, because they expect a postve return when they dversfy. 4.2 Estmaton Methodology We ntally assume that dversfcaton can be a potental element of ncreasng sgnfcantly the household's net expected proft. In the sample we have dversfers and non-dversfers. As we just know the effects that dversfcaton has over the net expected proft on these households that have yet dversfy, we faced up to a problem of sample selecton. If we do not correct that problem we wll obtan a based estmators of the effect that dversfcaton has over the household's net expected proft. To correct the problem of selecton sample we estmate, on one sde, the net expected proft to the dversfed houlseholds and on the other sde, to those that not dversfy. If dversfcaton s gven by D = α 0 +α 1 (C) + u 1; D = C ˆ + ε D = 0 If C ˆ + ε > 0 If C ˆ + ε 0 Dversfcaton lkelhood s gven by: ( Cˆ + ε > 0) = Pr( > Cˆ ) = 1 F( Cˆ ) P = Pr ε where F s the accumulated dstrbuton of ε.

19 Dversfcaton expectng value when t s postve, s gven by the followng expresson: If the ε are normally dstrbuted (normal estàndar), the prevous expreson takes the followng form: [ ] ( ) ( ) ( ) () ( ) ( ) C F C f C d f C F C C E C C C E D D E C ˆ 1 ˆ ˆ ˆ 1 1 ˆ ˆ ˆ ˆ 0 / ˆ = + = > + = > + + = > ε ε ε ε ε α α

20 E f Cˆ Cˆ ( = = + f c 1 F( Cˆ ˆ ) ε ( D) E( D / D > 0) ) Pr( D > 0) f () ( ) ( Cˆ ) d F Cˆ Cˆ ε ε = + 1 F( Cˆ ) F ( Cˆ ) To conclude, the model that we have to estmate s: B d = β C + u S C ˆ + > ε 0 d d γ ( = 1) D B nd = β nd C + u nd S ˆ + ε 0 γ C ( = 0) D We proceed to defne the log lkelhood functon correspondng to the dfferents sample groups: L j D γcˆ ( B ε ) dε π f ( B, ε ) = + π T j g d, 1 T γcˆ 2 j Where: T 1j, s a dversfed actvty, and T 2j, s a non-dversfed actvty, such that T 1j + T 2j = T j, g (...) and f(...) are the densty functons of two bvarant normal dstrbuton. nd dε 1 D If we defne y and z respectvelly, as the maxmum and mnmum lmts of proftablty that can be reach dversfyng and non-dversfyng ths expreon takes the followng form: L j = + z C z d d d [( ) ] [( ) ] T j G Bd C d d J B C d d d T j γ ˆ π β / σ, ε ε π 2 nd β nd nd / σ nd, ε 1 γ C y B β C σ d D y B d nd β σ nd nd C nd dε 1 D

21 Where G (...) and J (...) are the densty functons of bvarant normal dstrbuton wth unt varance, and the values of y and z are gven by: y Y = β C σ n k k Z z = β kc σ k k Where k = dversfy and non-dversfy actvtes. 4.3 Modelng to the dversfed households E ( B / D = 1) = E( β C + u / D = 1) = E( β C + u / δcˆ + ε > 0) = β C + E( u / ε > δcˆ ) d d d d d d d d d d Where, E ( u d / ε δcˆ ) 0 > Gven that, applyng least square to the equaton D d = β C d + u d, we obtan nconsstent estmators: E ( ) ( ) ( Cˆ ) u d Cˆ d E Cˆ φ δ / ε > δ = σ ε ε / ε > δ = σ dε [ 1 Φ( δcˆ )] Where φ Φ are respectvelly, the standar normal probablty densty and dstrbuton functons. The expresson that we obtan to ε (0, σ 2 ε) s: φ ( ) ( δ ˆ σ ) ε δ ˆ C / / σ ε d > Cd = d [( 1 Φ( δcˆ / σ ) σ ] E u ε ε To estmate ths equaton n a consstent way, we should apply least squares to: B + u d = β d Cd + λσ dε * d

22 Where λ = φ( δcˆ ) [ 1 Φ( δcˆ )] 4.4 Modelng to non-dversfed households: Cˆ E B = = + = nd D ndcnd E und Cˆ δ / 0 β / ε δ β ndcnd σ ndεε φ Φ δcˆ So that, f we want to estmate consstently, we have to apply least squares: ( ) ( ) ( ) ( ) B = β C + σ τ + u nd nd nd ndε * nd Where φ τ = Φ ( δcˆ ) ( δcˆ ) Ths wll be the modellng scheme (1) but there are also two other stuatons: one (scheme 2) stuaton s when the global net return s negatve where the optmum decson s not to dversfy; and the other (scheme 3) s when t s postve then the optmum decson s todversfy SCHEME: Stuaton n whch dversfcaton global net return of s negatve. In ths case, the optmum soluton s not to dversfy. Maxmsaton functon depends on the followng restrctons: D restrctons: we assume that dversfcaton cannot take a negatve value: D 0 Returns restrctons: we assume that σ a < 0 and σ b > 0, expectng net returns of on-farm dversfcaton s: πσ ( 1 π ) σ 0 a + b The optmum decson s not to dversfy because, expectng net returns s negatve, so that, D* = 0. 3 SCHEME: stuaton where the expected net return of on-farm dversfed actvtes s postve: Maxmsaton functon depends on: D restrctons: we assume that dversfcaton can take a negatve value: D 0

23 5. Concludng remmarks Ths paper develops a method for measurng the mportance that on farm dversfcaton has for farm households n a varety of European rural areas. We approxmate the concept "survval of the farm" n terms of proftablty. So that, the null hphotess s that dversfcaton ncreases the household's profts. If the farmer beleves that dversfcaton has a sgnfcant mpact on the proftablty, hs decson wll be obvously, dversfy. The theoretcal model sets out a maxmzaton problem under possble actvtes of dversfcaton. As we ponted above n the text, dversfcaton and ts process s determned by nternal and external factors. It s possbe that the proftablty of a dversfy actvty between two households vary because those nternal and external factors. In ths context, under the assumpton that dversfcaton contrbutes to the "survval of the farm" n terms of proftablty, the approach used here for measurng the mportance of on farm dversfcaton, nvolves a frst probt modellng of the sgnfcance and relevance of the household's characterstcs over the on farm dversfcaton probablty. We consder that the exstng arrangement between heterogeneous on farm household's characterstcs can, n a substantal way, determne the net proftablty rate of one and so, t can serously determne dfferent dversfcaton probabltes for two households accordngly to ts exposure degree to dfferent nternal and external factors. Ths s one of the most mportant nformaton that the model gves, because we wll be able to detect those elements that are sgnfcant -postvely or negatve- to dverfcaton and to establsh some suggestons of polcy. Once the mportance and sgnfcance of these nternal and external factors are determned, the last step of the measurement s contrast the sgnfcance that Returns restrctons: we assume that σ a > 0 and σ b > 0. In ths stuaton the expected net

24 dversfcaton has on the ncrease of proftablty. To that end, we wll compare the proftablty between the sample of dversfers and non-dversfers usng the Ordnary Least Square method. Ths method should enable us to obtan emprcal results and to examne the mpact that on farm dversfcaton has on rural development under the evolutnary (Sundbo, 1995) and network theoretcal (Lowe, P.et al.; 1995;...) approaches used n the IDEAS project. References: Benjamn C, 1994, The Growng Importance of Dversfcaton Actvtes for French Farm Households, n Journal of Rural Studes, Vol. 10, no. 4, pp Bowler, I; 1999, Modellng Farm Dversfcaton n Regons Usng Expert and Decson Support Systems, n Journal of Rural Studes, Vol. 15, no. 3, pp Gllmor D A and Byron R, 1995, Dversfcaton on farms n the development of margnal regons: potental opportuntes and constrants, Economc futures on the North Atlantc margn: selected contrbutons to the Twelfth Internatonal Semnar on Margnal Regons, pp , Avebury, Aldershot, UK. Lowe, P., Murdoch, J. & Ward, N.; 1995; Networks n rural development beyond exogenous and endogenous models ; en J.D. van der Poeg y G. Van Djk (eds.); Beyond modernsaton; the mpact of endogenous rural development. Assen. Slee W, 1990, "Alternatve Enterprses: ther role n the adjustment of UK farmng"; n Buller H and Wrght S, Rural Development: Problems and Practces. Sundbo, J.; 1995; Innovaton theory: 3 paradgms. Scence and Publc Polcy 22(6), p ). return of on-farm dversfcaton s postve, so that the optmum decson s to dversfy.

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