In this article we propose a theoretical model for analyzing capital requirement in agricultural production and define excess capital thereupon. We develop a two-step method that allows endogenous regressors in the maximum likelihood estimation. The two-step procedure is also capably of recovering the parameters of time invariant variables in fixed effect models. The model and method are applied to a capital requirement study using data from cash crop farms in the Netherlands. Empirical results show that excess capital widely exists on the farm. The implications of excess capital are further demonstrated with a production frontier analysis.


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