Perpetuation of subsistence farming in Kosovo: the role of factor market imperfections

This paper investigates the determinants of agricultural households’ product commercialization in Kosovo in 2005, focusing on imperfections in output and input markets. Based on household modelling in the context of transaction costs and data from a survey 4,187 agricultural households, the share of output sold is regressed over a set of explanatory variables using a truncation regression accounting for potential endogeneity. Results show that high labour price, low land availability and relatively poor physical infrastructure are strong impediments to commercialization of agriculture in the region. Similarly to developing countries, this calls for active rural development and educational policy which can create labour opportunities for agricultural households. However, the large support from the diaspora implies that transforming the agricultural sector into a commercial one may need more than the traditional instruments of rural development policies in order to provide incentives for the use of remittances for productive investment