Barriers to exit encountered by small farms in light of the theory of new institutional economics

Abstract

For at least 25 years, processes involving structural changes have been growing more and more intense in the countries of Central and Eastern Europe, with these processes including a decline in the number of small farms. The main aim of this paper is to present the mechanisms involved in, as well as barriers to and costs preventing the exit of farms from agriculture, including those that make it difficult to transfer production resources which are being released to other companies. This research takes the form of an overview and is based on the output of new institutional economics, and on transaction cost and rent-seeking theories in particular. The most frequent difficulties encountered in the process of exit from farming include low profitability of production and the shortage of capital among potential buyers, while the lack of sellers’ financial resources and the necessity of incurring expenses related to preparing and finalising the sale of resources held by them (the actual transaction costs related to closing down farms) are frequently overlooked. The most important barriers preventing the complete liquidation of farms are the inherent transaction costs categorised as expenses, as well as the emotional costs and costs of alternatives, which are difficult to evaluate and estimate. The following notions are particularly helpful in explaining barriers to exit from farming: the concept of transaction costs and rent-seeking theory, which are both a part of the stream of thought of new institutional economics.

Departure from farming in Polish metropolitan areas – assessment of the scale and spatial differentiation

“…Nowadays, there is no doubt that the occurrence of differential and institutional disability pensions, as well as the phenomenon of the pursuit of disability (rent-seeking) described by Krueger [1974] and Tullock [1988], significantly influence the direction and pace of changes in agriculture. The theory of pursuit of disability benefits tries to provide an answer to the question of how economic entities, including agricultural holdings, strive to obtain measurable benefits by obtaining public funds or shaping favourable conditions for conducting economic activity [Czyżewski, Brelik, 2014;Satola et al, 2018]. The pursuit of rent should be considered a common phenomenon in the conditions of an active role of public institutions, including the European Union, in shaping macroeconomic conditions for agricultural production.…”

Generational Changes in Agriculture: The Influence of Farm Characteristics and Socio-Economic Factors

“…The authors point out that slightly further away from the MA core, it is very difficult to combine off-farm employment with running a farm. The lack of these trends (of exiting from farming by small farmers) in the BCCMA zone can, however, be explained by the occurrence of the phenomenon of rent seeking-the owners of agricultural land do not want to give up a number of privileges connected with being a farmer (area payments, large tax, and insurance preferences) and expecting the rise of the land price in the long-term [37]. This is not conducive to generational changes.…”

“…In addition, the net migration is strongly correlated with both the average salary (Pearson correlation coefficient = 0.28) and entrepreneurship (correlation coefficient = 0.58), as well as unemployment rate (correlation coefficient = −0.46). Thus, the same areas experience a doubled negative effect on generational changes: on the one hand, an attractive labor market encourages farmers to leave the agricultural sector, and on the other, competition for land inhibits farm development processes (the effect of land speculation also plays a significant role) [37,38]. In such conditions, mainly multifunctional and specialized farms (e.g., vegetable, fruit, etc.…”

“…On the one hand, the proximity of large urban centers with an attractive labor market does not facilitate the transfer of farms to younger family members, who rather tend to choose to work in non-agricultural industries where they are likely to be offered higher salaries [10,14,36]. Moreover, opportunities for the development of farms are limited by a large demand for land from the non-agricultural sector (for the purposes of residential construction, development of social and technical infrastructure) as a result of an increased population density and by speculation by landowners [14,37,38]. Consequently, the number of potential successors is likely to be smaller.…”

“…These factors determine, among other things, availability of land (competition for land) and its prices. Of considerable importance was also the occurrence of the phenomenon of rent seeking and increasing speculation, which "freeze" the agricultural land market [37,45]. Table 3.…”