Working Paper: NBER ID: w23909
Authors: Andrew D. Foster; Mark R. Rosenzweig
Abstract: This paper seeks to explain the U-shaped relationship between farm productivity and farm scale - the initial fall in productivity as farm size increases from its lowest levels and the continuous upward trajectory as scale increases after a threshold - observed across the world and in low-income countries. We show that the existence of labor-market transaction costs can explain why the smallest farms are most efficient, slightly larger farms least efficient and larger farms as efficient as the smallest farms. We show that to explain the rising upper tail of the U characteristic of high-income countries requires there be economies of scale in the ability of machines to accomplish tasks at lower costs at greater operational scales. Using data from the India ICRISAT VLS panel survey we find evidence consistent with these conditions, suggesting that there are too many farms, at scales insufficient to exploit locally-available equipment-capacity scale-economies.
Keywords: farm productivity; farm scale; labor-market transaction costs; machine capacities; optimal farm size
JEL Codes: O13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Small Farms (Q12) | Efficiency (D61) |
| Farm Size (Q15) | Diminishing Returns to Scale (D24) |
| Land Consolidation (Q15) | Productivity (O49) |
| Farm Size (Q15) | Productivity (O49) |
| Labor-Market Transaction Costs (F16) | Farm Size (Q15) |
| Economies of Scale in Machinery Capacity (D24) | Productivity (O49) |
| Farm Size (Q15) | Labor Costs (J30) |