Seminar on "Are There Too Many Farms in the World? Labor-Market Transaction Costs, Machine Capacities and Optimal Farm Size"

Abstract

Farm size in low-income countries, as well as China, is much smaller than that in developed countries, and farm productivity is also substantially lower. 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. Based on structural estimation and calibration methods, we identify the minimum farm scale in India that maximizes the return on land, which we find is eight times the size of the median Indian farm. We calculate that if all farms were this size, the number of farms would be reduced by 82.2% and the labor force in agriculture would be reduced by 41.3% with no loss in total output. The analysis thus suggests that there are indeed too many farms, at scales insufficient to exploit locally-available equipment-capacity scale-economies.

Biography

​Mark R. Rosenzweig is the Frank Altschul Professor of International Economics and Director of the Economic Growth Center at Yale. He is also a Distinguished Adjunct Professor of Economics at Lingnan University. He is a development economist who pioneered in the use of microeconometric methods for studying the causes and consequences of economic development and the role of human capital. Rosenzweig is Co-Editor of the Handbook of Family and Population Economics and of the newest Handbook of Development Economics. Rosenzweig also recently served as Editor-inChief of the Journal of Development Economics. He is a Fellow of the Econometric Society, a Fellow of the Society of Labor Economists, a Fellow of the American Academy of Arts and Sciences, and a Yangtze River Scholar. Rosenzweig earned B.A., M.A. and Ph.D. degrees from Columbia University