National Farm Survey data for Ireland shows that in the ten year period from 1995 to 2005 average farm incomes declined by almost 17 percent while net new investment increased by almost 30 percent in real terms. This paper explores the factors affecting farmers’ decisions to invest in farming. In particular, the role of non-farm income in the farm investment decision is explored. The theory that farmers may be investing non-farm income in the farm business is tested empirically. Economic theory suggests that it may be rational for part-time farmers to substitute capital for labour, thereby releasing labour for off-farm work while still maintaining farm output. The results of the econometric models estimated in this paper lead us to reject this hypothesis. The results indicate that, when farm size, system and income are controlled for, the presence of off-farm income earned by the farmer decreases the probability of farm investment and has no significant effect on the level of farm investment. The effect of off-farm income earned by the farmer’s spouse is less clear. The presence and level of the spouse’s off-farm income increases the probability of farm investment, although it has no significant impact on the level of investment.
