Direct payments, spatial competition and farm survival in Norway

We argue that interdependencies between farms are crucial for assessing effects of direct payments on farmers exit decisions. Using spatially explicit farm level data for nearly all Norwegian farms, a binary choice model with spatially lagged explanatory variables is estimated in order to explain farm survival from 1999 to 2009. We show that ignoring spatial interactions between farm leads to a substantial overestimation of the effects of direct payments on farm survival. To our knowledge, this paper is the first attempt to empirically analyze the role of neighbor interactions for farm structural change in general and for an assessment of the effects of direct payments on farm survival in particular.