Do family farms really converge to a uniform size? The role of unobserved farm efficiency

We analyse the growth of family farms in Israeli cooperative villages during a period of economic turmoil. We use instrumental variables to account for the endogeneity of initial farm size, and correct for selectivity as a result of farm survival. We also include a technical efficiency index, derived from the estimation of a stochastic frontier production model, as an explanatory variable. Our aim is to check whether ignoring efficiency could have been the reason for convergence results obtained elsewhere in the literature. We found that technical efficiency is an important determinant of farm growth, and that not controlling for technical efficiency could seriously bias the results. In particular, larger farms are found to grow faster over time, while without controlling for technical efficiency the farm growth process seemed to be independent of initial farm size. The increasing polarisation of farm sizes in Israel has ramifications for the inefficiencies induced by the historical quota system, for the political power of the farm sector and for the social stability of farm communities.