Determinants of agricultural diversification: What really matters? A review

Abstract

Diversification of farm activities is one of the strategies to reduce the risk associated to the farm business and stabilise farmers’ income, in particular for smaller farms. Diversification may result in on-farm activities (e.g. agritourism) or off-farm, which indicates that farmers seek additional income in the labour or investment market off their farms. Understanding the determinants of diversification is important to anticipate farms that are more likely to diversify their activities, explore regional differences, and propose effective policies when decision–makers believe that wider diversification is desirable. In this contribution, we review the scientific literature on on-farm and off-farm diversification and collect all the variables that have been included in the econometric specifications to offer a better picture of all the important determinants of diversification practices and improve future modelling. The review suggests that the number of factors that may influence diversification is large and most of the models fail to consider all the important factors, possibly due to lack of some important data in secondary dataset. An important implication is therefore to improve data collection for future applications. In addition, potential issues related to endogenous variables should be better highlighted. Lastly, it was noticed a dearth of contributions that explore regional and environmental factors that may be important to explain diversification.