Are There Too Many Farms in the World? Labor-Market Transaction Costs, Machine Capacities and Optimal Farm Size
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.
This research supported in part through NIH Grant P2C HD041020. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- In India, labor market practices and the fixed cost of acquiring capital goods combine to make medium-size farms less productive than...