FG 986: Structural Change in Agriculture - TP 02: Relevance of finances and capital markets for farm investments

Financial resources are a major determinant of farm development. It is particularly important in countries which are in the process of economic transition where modernization and rationalization investments are needed to catch up economic development. Farm business enterprises have often difficult and limited access to capital markets. Thus, investments are mainly financed by bank loans. However, incomplete and underdeveloped capital markets in transition countries are obstacles in economic development and are connected with problems like the phenomenon of Soft Budget Constraints (SBC). This implies inefficient softening of hard budget constraints by state subsidies. The economic impacts of the SBC-Syndrome are still ambiguous. Furthermore, there is still an ongoing discussion if candidates or New Member States in Central and Eastern Europe catch up lacks in productivity in comparison to other European Member States. Without doubt, if capital is not available for farm enterprises in transition countries the catching-up process will slow down and delay. In addition, limited capital access and imperfect capital markets strongly affect the development of the micro-structure of farms. But the impacts differ by farm size structures whereby larger farms, former state cooperatives, are mainly affected by the SBC-Syndrome and smaller farms are mainly credit constrained. The objective of this project is to improve the understanding of farm investment behaviour. In particular, the aim is to explore if imperfect capital markets exist in the agricultural sector and how these affect farm investment behaviour. The empirical part of this project focuses on the comparison of German and Ukrainian farms in order to prove if farms in economic transition are stronger affected by imperfect capital markets and are therefore hindered in economic development. For the aforementioned purposes a dynamic and stochastic investment model with an augmented adjustment cost function is worked out. The intention thereby is to explore the coexistence of capital market imperfections, irreversibility and uncertainty. The improved understanding of farm investment behaviour provides an new basis to explain farm growth, development of farm structure and thus structural change.