Effects of switching between production systems in dairy farming

The increasing intensification of dairy farming in Europe has sparked an interest in studying the economic consequences of this process. However, empirically classifying farms as extensive or intensive is not a straightforward task. In recent papers, Latent Class Models (LCM) have been used to avoid an ad-hoc split of the sample into intensive and extensive dairy farms. A limitation of current specifications of LCM is that they do not allow farms to switch between different productive systems over time. This feature of the model is at odds with the process of intensification of the European dairy industry in recent decades. We allow for changes of production system over time by estimating a single LCM model but splitting the original panel into two periods, and find that the probability of using the intensive technology increases over time. Our estimation proposal opens up the possibility of studying the effects of intensification not only across farms but also over time.