Income Diversification of Farm Households: Relevance and Determinants in Germany

During recent years, the number of farms able to generate satisfactory income from agricultural production has continuously decreased in advanced economies. The main reasons are the implementation of the Common Agricultural Policy of 1992 and the increasing capitalization of the primary sector. The relevance of income diversification and interest in various development paths of rural households have, therefore, been renewed in political-economic debates in those countries. The aim of this study is to identify factors that determine income diversification in Germany. An econometric model has been estimated based on a comprehensive survey’s data. The results show that the main economic incentive for farm diversification is the expected income increase or resource allocation, whereas risk minimization is less relevant. Access to resources (labor, capital) is an important requirement for tapping alternative economic activities. Other significant variables include the education of the farmer as well as his experience in managing the farm. These findings are relevant for designing effective agricultural policy measures to explicitly meet the heterogeneous needs of the rural households.