Farm-specific Adjustment Costs in Dutch Pig Farming

This paper develops a dynamic model of investment under rational expectations, assuming farm-specific production technologies and adjustment cost structures. The model distinguishes regimes of negative, zero and positive investments and maintains that it is optimal for a farmer not to invest for a range of shadow prices, depending on thresholds for positive and negative investments. The model is applied to a rotating sample of Dutch pig farms over the period 1980-1996. Farm-specific parameters of the adjustment cost function and production technology are obtained using Generalised Maximum Entropy estimation. Cluster analysis using the farm-specific adjustment cost parameters indicates that five groups of farms with distinct adjustment cost structures can be identified. A tobit regression analysis is used to explain the impact of different socio-economic factors on the size of the threshold between positive and negative investments