Distortions, Producer Dynamics, and Aggregate Productivity: A General Equilibrium Analysis
The expansion in farm size is an important contributor to agricultural productivity in developed countries, but the reallocation process is hindered in less developed economies. How do distortions to factor reallocation affect farm dynamics and agricultural productivity? We develop a model of heterogeneous farms making cropping choices and investing in productivity improvements. We calibrate the model using detailed farm-level panel data from Vietnam, exploiting regional differences in agricultural institutions and outcomes. We focus on south Vietnam and quantify the effect of higher measured distortions in the North on farm choices and agricultural productivity. We find that the higher distortions in north Vietnam reduce agricultural productivity by 46%, accounting for around 70% of the observed 2.5-fold difference between regions. Moreover, two-thirds of the productivity loss is driven by farms' choice of lower productivity crops and reductions in productivity-enhancing investment, which more than doubles the productivity loss from factor misallocation.
We thank Tasso Adamopoulos for help with the grid land-quality data for Vietnam. For useful comments we thank Costas Azariadis, Dan Cao, Julieta Caunedo, Klaus Desmet, Mark Huggett, David Lagakos, Toshi Mukoyama, Richard Rogerson, Kirk White, Zoltan Wolf, and seminar participants at Georgetown, UBC, ASU Herrendorf memorial conference, and US Census. All remaining errors are our own. Restuccia gratefully acknowledges the support from the Canada Research Chairs program and the Bank of Canada Fellowship program. The views expressed herein are those of the authors and should not be attributed to the Bank of Canada or its Governing Council, nor the IMF, its Executive Board, its management, or the National Bureau of Economic Research.