Working Paper: NBER ID: w24564
Authors: Gnther Fink; B. Kelsey Jack; Felix Masiye
Abstract: Many rural households in low and middle income countries continue to rely on small-scale agriculture as their primary source of income. In the absence of irrigation, income arrives only once or twice per year, and has to cover consumption and input needs until the subsequent harvest. We develop a model to show that seasonal liquidity constraints not only undermine households’ ability to smooth consumption over the cropping cycle, but also affect labor markets if liquidity-constrained farmers sell family labor off-farm to meet short-run cash needs. To identify the impact of seasonal constraints on labor allocation and agricultural production, we conducted a two-year randomized controlled trial with small-scale farmers in rural Zambia. Our results indicate that lowering the cost of accessing liquidity at the time of the year when farmers are most constrained (the lean season) reduces aggregate labor supply, drives up wages and leads to a reallocation of labor from less to more liquidity-constrained farms. This reallocation reduces consumption and income inequality among treated farmers and increases average agricultural output.
Keywords: seasonal liquidity; rural labor markets; agricultural production; randomized controlled trial; Zambia
JEL Codes: D14; J2; J43; O13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lowering the cost of accessing liquidity during the lean season (Q14) | reduction in aggregate labor supply (J20) |
| lowering the cost of accessing liquidity during the lean season (Q14) | increase in wages (J38) |
| lowering the cost of accessing liquidity during the lean season (Q14) | reallocation of labor from less to more liquidity-constrained farms (J43) |
| reallocation of labor from less to more liquidity-constrained farms (J43) | reduced consumption and income inequality among treated farmers (Q12) |
| lowering the cost of accessing liquidity during the lean season (Q14) | increase in average agricultural output (Q11) |
| lowering the cost of accessing liquidity during the lean season (Q14) | decrease in likelihood of families selling ganyu labor during the hungry season (J43) |