FOR 2569/2: Efficiency of agricultural land markets – The role of liquidity and competition

Subproject 2 investigates price formation on agricultural land markets
considering the interplay of (incomplete) competition, structural
change, and market liquidity. The core question is: Are observed land
transactions and prices the outcome of an efficient reallocation of a
scarce resource or are they plagued by the exercise of market power
resulting from the immobility of land? Furthermore, is the low
observed liquidity in land markets the result of dynamically optimal
decisions of market participants or is it an indicator of market
inefficiency in the sense that observed prices do not reflect available
information on farmland values? Finding answers to these questions
is of utmost importance for this research unit because they may or
may not provide the rationale for land market regulation. In general,
market liquidity in the sense of market depth and immediacy is closely
related to market efficiency: It describes the ability of market
participants to realize desired buy or sell transactions without a time
delay. The determinants and impact of liquidity are well-explored in
financial markets. However, there is little knowledge about the
relationship between market liquidity and prices on land markets. Our
objective here is twofold: First, we intend to measure market liquidity
on land markets with different indicators and methods. Second, using
a real options approach, we strive for a microeconomic explanation of
market liquidity, focusing on the supply side of the market. A major
concern about unregulated land markets is that the resulting
allocation of land fosters an undesired agricultural structure in a sense
that large industrialized farms gain a competitive advantage over
smaller family farms and that young farmers with financial constraints
cannot compete with financial investors. We will empirically explore
farms’ growth decisions, accounting for their relative market position.
We include indicators of competitiveness, particularly concentration
measures, and farm characteristics into our analysis. Computing
concentration measures that serve as a proxy to power on the land
market requires defining the relevant market, which is a specific subgoal
of our analysis. On thin farmland markets with heterogeneous
land, a gap between the willingness to pay of buyers/tenants and the
willingness to accept of land owners results in a bargaining process
over the price of land. Until now, bargaining power has been
examined in the literature to the extent that hedonic pricing models
under perfect competition have been adapted to thin markets with
heterogeneous goods. We complement these econometric
approaches with the development and estimation of a structural
model. To this end, we derive a bargaining model from game theory
literature, such as the ultimatum game and sequential bargaining
models.

Spokesperson
Odening, Martin Prof. Dr. agr. habil. (Details) (Agricultural Farm Management)

Other Team Members
Ritter, Matthias Prof. Dr. (Details) (Quantitative Agricultural Economics especially Applied Econometrics)

Financer
DFG: Forschergruppen

Duration of Project
Start date: 08/2020
End date: 07/2023

Research Areas
Agricultural Economics and Sociology, Agriculture, Forestry and Veterinary Medicine, Life Sciences

Last updated on 2020-26-08 at 15:05