Perpetuation of subsistence farming in Western Balkans: the role of factor market imperfections

The paper analyses the imperfections in output and factor markets in Kosovo that act as a barrier to farm commercialisation. On the one hand, agricultural households may not have access to output market due to an underdeveloped downstream sector. On the other, local producers might not be preferred to importers as their production level is small with a variable quality due to constraints in factor markets. Data from the Agricultural Household Survey 2005 are used. A conceptual framework is developed on the basis of a household model where non-separability results from a “wedge” between purchase and sale prices due to transaction costs. The share of the output sold in the total value of output is regressed over a set of explanatory variables. A truncated regression is employed due to the high percentage of the dependent variable having the value of zero. Many of the observations do not contain all three factor prices - land rent, wages and interest. For this reason three separate regressions are run, each containing one of the prices. The model including wages is non-separable. Households with more members sell less as they have preferences for household needs. This calls for active rural development and educational policy which can create labour opportunities for agricultural households.