these two parameters against operated farm size in figure 3 provide two insights. First, as expected if farm-level fixed effects proxy for managerial ability as an indivisible factor, better managers operate larger farms. Also, the absolute magnitude of rayon-level effects exceeds that of farm-fixed effects for farms above about 1500 ha. In other words, large farms locate in rayons with more favorable endowments and the size of benefits from the associated location-specific rents exceeds those from managerial efficiency. For ‘smaller’ farms (200 to 1,500 ha), rayon-level effects have a quantitatively smaller impact on productivity than the managerial ability of their operators.

The spatial distribution of rayon fixed effect presented in figure 4 provides an additional insight. The highest region-specific productivity shocks are observed in the central part of Ukraine, which roughly corresponds to the distribution of the soil fertility. As the rayon fixed effect comprise both soil fertility and the effect of infrastructure, studying of their relative contribution requires further attention.

If markets work, any input’s marginal value product will equal its price or its factor share the coefficient on this input in the production function (Dobbelaere and Mairesse 2013). While more detailed data and study would be required to assess the underlying factors, use of production function estimates to test for the functioning of factor markets in this way provides some insights (table 5, column 4 and 5). It suggests that labor markets are reasonably competitive. However, land rents remain significantly below the marginal product, possibly making it rational to accumulate large amounts of land without being able to use it most efficiently.<sup>20</sup> Fertilizer and services’ cost shares are above these factors’ marginal product. This could be due to non-competitive markets for services, failure to provide them in a timely manner, or high cost of credit being added to such factors. They could affect productivity in the longer term if, as a consequence, farmers apply fewer nutrients than they take off via crops and thus drive down long-term soil fertility. It is observed, however, that the size of imperfections on several input markets has decreased over time. The only deterioration in market functioning is observed in the market for seeds. Results are robust to inclusion of other controls (e.g. producers of livestock, producers of agricultural services) and to the functional form (the trans-log function produces similar results for the sample average).<sup>21</sup> Displaying farm fixed effects separately for those who entered, exited, and remained in the sample in fig. 5 illustrates the contribution of entry and exit to productivity dynamics. Entry appears to be a key determinant of structural change as efficiency of incumbents who remained in the sample first-order dominates that of exiters while itself being first-order dominated by permanent (though not all) entrants. Descriptive data support this, suggesting that, while entrants located in more favorable rayons, farm-

> 20 Data on leases would be needed to distinguish the extent to which this is a result of farmers being locked into long-term leases concluded when agriculture was still very unprofitable or limited competition at local level. 21 Results are available upon request.

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