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Abstract

We analyze the simultaneous determination and evolution over time of two decisions made by self-employed farm operators: off-farm work and the level of farm activity. Using a panel of Israeli farm households observed in 1981 and 1995, we estimate jointly a multinomial choice model of work activity and an endogenous switching regression of farm size that enables us to account for unobserved heterogeneity and correct for simultaneity bias. The results show that changes in farm size are closely linked to the off-farm labor decisions. In particular, we identify two different paths in the evolvement of farm families over time. Farms that expand and have a low likelihood of working off the farm follow one path, while other farms downsize their farming operation and increase their engagement in the off-farm labor market. Therefore, the distribution of farms is converging towards a bi-modal distribution, with large farms operated by full-time farmers on one extreme and smaller part-time farms on the other extreme, whose income is derived mostly from off-farm sources. These results could not have been obtained without treating the level of farm activity as endogenous to the work choice decisions.

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