THE USE OF MAXIMUM ENTROPY IN ANALYZING FIRM INDUSTRY DYNAMICS - AN APPLICATION TO EUROPEAN FARM STRUCTURES

Kostas KARANTININIS (The Royal Veterinary and Agricultural University of Copenhagen, Denmark)

Farm structures follow differentiated patterns in different countries. Historical, institutional and economic variables affect the industry dynamics in each country. In this paper we employ a first order Markov chain model of industrial structural change. The pork farms each country-member of the EU-15 are categorised in size groups and frequencies are recorded every fourth year. A generalised cross entropy instrumental variables estimator is used to recover the non stationary transition probability for each one of the 15 countries. A set of exogenous variables, such as input and output prices of pork meat and substitutes are employed in order to explain the evolution of structural change. A technique is also developed to recover missing data points due to category re specifications. The impact of a set of exogenous variables (prices of pork meat, inputs, and pork substitutes), are evaluated in the form of elasticities. An overall assessment of entry exit and growth of farms is performed. Farm structures exhibit differentiated dynamics between countries. Several patterns are also investigated between groups of countries in North and South. The relation of overall economic growth and the specific pork industry growth and structural change is also examined. A heuristic test of Gibrat's law is also developed.