Does Farm Size Really Converge? The Role of Unobserved Farm Efficiency

We analyze the growth of family farms in Israeli cooperative villages between 1981 and 1995, using longitudinal data. We use instrumental variables to account for the endogeneity of initial farm size, and correct for selectivity due to farm survival. We also include a technical efficiency index, derived from the estimation of a stochastic frontier production model, as an explanatory variable. We find that technical efficiency is an important determinant of farm growth, and that not controlling for technical efficiency could seriously bias the results. The size distribution of Israeli family farms is found to be mostly diverging, while without technical efficiency farm growth seemed to be predominantly random.