Probability and Timing of Succession or Closure in Family Firms: A Switching Regression Analysis of Farm Households in Germany

Abstract

In a two-step econometric approach that corrects for selectivity bias, we analyze the determinants of the probability of succession and the timing of succession or closure in a unique sample of 233 North-German family farms. We set up the succession decision as an intertemporal optimization problem. The empirical results show that larger and more profitable farms which are specialized in dairy production are significantly more likely to have an intra-family successor. We find that a non-agricultural education of the current manager or the successor delay succession. When the family decided to stop farming operations, a non-agricultural education of the owner delays closure of the farm. Closure occurs earlier if the manager is able to lease out the land in the process of retirement. Although farm households react to incentives originating from tax and pension regulations, many important determinants of succession are beyond the control of policymakers.