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 sub-goal 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
Ritter, Matthias Prof. Dr. (Details) (Quantitative Agricultural Economics especially Applied Econometrics)
Odening, Martin Prof. Dr. agr. habil. (Details) (Agricultural Farm Management)

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 15:09