Farmer Education and Farm Efficiency: The Role of Education Revisited

If labor market participation for self-employed farm households and family labor use in family farms are decisions determined endogenously, the estimation of production (or profit) functions suffer from a simultaneity bias unless appropriate instruments are used. An agricultural household model that encompasses both the production and consumption decisions of farm operators can motivate the choice of such instruments. A conditional profit function is estimated with an endogenously determined family labor demand function. Differences in production behavior conditional on farm household's participation in the labor market are tested using a two-stage switching regressions model with a criterion function that enables endogenous switching. Empirical results using farm-level survey. data from Bangladesh indicate that endogeneity of family labor demand is indeed statistically significant for farm households who do not participate in the labor market, but is not significant for those who do participate in the labor market. The results further suggest that the effect of education is underestimated when account is not taken of the endogeneity of labor demand. When the productivity gains made from decisions regarding appropriate level and mix of family labor use in farm and off-farm market uses are taken into account, r'esults indicate that farmer education has indeed a productive value to farm efficiency. FADER EDUCATION AND FADI EFFICIENCY: THE KOLE OF EDUCATION REVISITED• Introduction The role of education in increasing productivity has been recognized as an important form of human capital that may be essential for transforming traditional agriculture (Schultz, 1964). Much research has sought to evaluate the productive role of education for developing agriculture (Yotopoulos, 1967; Lockhead, Jamison, and Lau, 1980; Ram, 1980; Jamison and Moock, 1981). The primary postulate is that education may have productive value to farmers because (1) it helps them to produce larger quantities of output from the same measured quantities of inputs, and because (2) it helps them to choose an optimal bundles of inputs, a more efficient outputmix, and a more appropriate scale.1 The approach often used to estimate the contribution of education to agricultural production is to estimate either a production function or a profit function with education as one of several regressors (Lockhead, Jamison, and Lau, 1980). This paper argues that with this approach the contribution of education may not be measured appropriately if the function is subject to simultaneous equation bias. Simultaneity bias may arise if production and consumption decisions of self-employed agricultural households are nonseparable. Nonseparability of production and consumption decisions in turn arise if households use family labor in family farms but do not sell out labor for market work. The paper is organized in the following manner. First, a brief summary of research using the production function framework for analyzing the contribution of education is presented and its potential bias if nonseparability between production and consumption decisions of farm households