# **Can Labor Market Imperfections Explain Changes in the Inverse Farm Size–Productivity Relationship?**

# **Longitudinal Evidence from Rural India**<sup>**1**</sup>

# **1. Introduction**

The existence of an inverse relationship between farm size and output per unit of land is among the most well established empirical regularities in agricultural production economics. First identified descriptively in Russia (Chayanov 1926), then confirmed by Indian farm management studies (Bardhan 1973; Srinivasan 1972), and subsequently supported by a much larger set of countries (Berry and Cline 1979), this relationship proved robust to numerous challenges. These include but are not limited to better accounting for land quality and soil characteristics, use of profits instead of output, increased precision of plot area estimates, and more sophisticated panel estimation techniques.

Barring measurement error, the most likely explanation for this phenomenon is market imperfections. However, which markets are affected, how amenable they are to change, and what this implies for policy have not been established clearly in the existing literature. To take one example, the inverse relationship has been used to recommend redistributive land reform as a way to improve efficiency and equity (Lipton 2009), but how to implement this in a way that avoids negative side effects is far from clear. Recognition that rising non-agricultural wages and new technology will affect factor price ratios, supervision requirements, and the presence and extent of market imperfections that might have caused the relationship in the first place has led many to reassess such policy advice to also account for political viability.

Also, changes in factor price ratios, which increase the attractiveness of substituting capital for labor in agricultural production, together with continued subdivision in the context of generational change, may limit the scope for mechanization and thus contribute to a reversal of the inverse relationship, making some farms (or, more accurately, plots) too small for efficient cultivation (Foster and Rosenzweig 2010). Recent innovations in crop breeding, tillage, and information technology also may make agricultural production more knowledge-intensive, thus eliminating part of small farmers’ traditional advantage. Most studies use cross-sectional evidence or short panels; longitudinal data at the household level could improve understanding of the relationship between farm size and productivity by allowing researchers to test how that relationship evolves in response to changes in technology and market functioning.

To provide such insights, this paper draws on panel data from close to 5,000 farm households in 17 Indian states over a 25-year period (1982–2008). We use panel regressions for the early (1982–1999) and late

> 1 We thank Jikun Huang, Keijiro Otsuka, Futoshi Yamauchi, and seminar participants at International Association of Agricultural Economists Triennial Conference in Milan, Italy, 2015 for helpful comments. Funding from DFID, the Bank’s Knowledge for Change Program, the Bill & Melinda Gates Foundation, and the CGIAR Research Program on Policies, Institutions, and Markets (PIM) is gratefully acknowledged.

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