The fallacy of composition on the example of incomes in European agriculture

Abstract

Determinants of agricultural income are often analysed both on sectoral and farm level. The results of this research are frequently contradictory. They may indicate the existence of the fallacy of composition. In the case of agriculture, it occurs when actions undertaken by the farmers to maximise their incomes bring opposite results to incomes analysed on a sectoral level. The aim of the paper is to examine in a systematic way whether this problem is real for agriculture in the European Union. Based on a literature review, a set of agricultural income determinants was established, as well as measure of that income. We constructed panel regression models based on a FADN (microeconomic) and EAA (sectoral) data. The results obtained indicate different sets of determinants of income on the farm and sector level. From the perspective of the individual farm, the intensification strategy proved to be effective despite higher dynamics of input prices than agricultural output prices, while in the sector as a whole, intensification growth has insignificant impact on income levels. In the case of specialisation, from the point of view of the whole sector, moderate specialisation may be optimal; in micro terms, either a high or low level of specialisation is more beneficial. Modernisation was a determinant of income in both sectoral and farm perspective. Overall our results indicate that the fallacy of composition exists also in the context of agricultural income.