As small farms grow productivity declines, but past a certain threshold output and productivity increase
Read “Are there too many farms in the world? Labor-market transaction costs, machine capacities and optimal farm size” by Andrew Foster and Mark Rosenzweig here.
The empirical evidence on the relationship between farm size and productivity has previously shown a dichotomy between high- and low-income countries: a positive relationship in rich countries and a negative relationship in poor countries. However, recent research across low-income countries has highlighted how measurement error through under sampling of large firms distorts what is a more complex relationship. In this VoxDevTalk, Mark Rosenzweig discusses his recent work with co-author Andrew Foster in which they analyse a panel data set on Indian farmers to uncover the nuances between farm size and productivity.
The authors uncover a U-shaped relationship between the two, where productivity initially decreases as small farms increase in size, but the relationship turns positive as firms continue to grow, leveraging available machinery and economies of scale. Given this relationship, they calculate an optimal farm size of 24 acres – compared to the current average farm size of 2.5 acres – that would yield increases in farm output by 42% and output per worker of 68%, coinciding with a 16% reduction of redundant labour in the agricultural labour force. While ten-fold expansions in farm size are unlikely to occur organically, attempts by policymakers to increase farm size and productivity should also accompany greater industrialisation so that excess labour in the market can be absorbed.