The objective of this study is to investigate the simultaneity between farm couples decisions on labor allocation and production efficiency. Using an unbalanced panel data set of Norwegian farm households (1989-2008), we estimate off-farm labor supply of married farm couples and farm efficiency in a three-equation system of jointly determined endogenous variables. We address the issue of latent heterogeneity between households. We solve the problem by two-stage OLS and GLS estimation where state dependence is accounted for in the reduced form equations. We compare the results against simpler model specifications where we suppress censoring of off-farm labor hours and endogeneity of regressors, respectively. In the reduced form specification, a considerably large number of parameters are statistically significant. Davidson-McKinnon test of exogeneity confirms that both operator and spouses off-farm labor supply should be treated as endogenous in estimating farming efficiency. The parameter estimates seem robust across model specifications. Offfarm labor supply of farm operators and spouses is jointly determined. Off-farm work by farm operator and spouses positively affects farming efficiency. Farming efficiency increases with operators age, farm size, agricultural subsidises, and share of current investment to total farm capital stock.