exist are few.<sup>25</sup> Some economies of scale are associated with the processing and marketing of many agricultural products, but this does not have important implications for the unit cost of farming operations as long as competitive markets for outputs and inputs exist. Alternatively, access to such markets is sometimes arranged through cooperatives. Only for a few "plantation crops" such as sugarcane, bananas, or tea could the need for immediate large-scale processing or marketing transmit economies of scale from the processing stage to production. To reap the economies of scale associated with the former, production of these crops is generally organized on a scale that corresponds to the optimum scale of the processing factory.<sup>26</sup> _Labor supervision cost:_ Constant returns to scale would imply that the size of agricultural operations has little impact on productivity. However, the need to supervise hired labor would confer a productivity advantage on owner-operated farm units. The fundamental reason for this is the presence of agency costs (Jensen and Meckling, 1976), which result from the need to manage wage labor and enforce effort in largescale operations. The lack of incentives for wage workers to exert effort, and the consequent need to supervise labor or to offer incentive contracts, has received considerable attention in industrial organization literature (Jensen and Meckling 1976), and is recognized to have profound implications for the organization of production and for the optimal size of the firm (Calvo and Wellisz, 1978; Eswaran and Kotwal 1985a and 1985b). The cost of supervision is particularly large in agricutural production due to spatial dispersion of the production process and the need to constantly adjust to micro-variations of the natural environment. Family members are residual claimants to profits and thus have higher incentives to provide effort than hired labor. 27 They share in farm risk, and can be employed without incurring hiring or search costs. These attributes underlie the general superiority of family farming over large-scale wage operations, manifested empirically in an inverse relationship between farm size and productivity. A large number of studies based on aggregate, or cross-sectional, and panel data have confirmed the existence of the inverse farm-size productivity relationship for all but the smallest farm size classes (Berry and Cline 1973, Carter 1984, Benjamin 1995, Newell et al 1997, Kutcher and Scandizzo 1981, Olinto 1995, Burgess 1997, Udry 1997).28 Thus, unless there are other countervailing forces, one would expect land markets to transfer land from large to small producers. We turn now to discuss these countervailing effects.

> 2 Exceptions are limited to cases of highly specialized machinery, specialized livestock production, or plantation crops where economies of scale are transmitted from the marketing to the production stage.

> **26** However, the supervision advantages of pwner-operators have in many cases motivated large processors to contract production out to smallholders under outgrower or contract farming schemes, often providing credit in kind as well as technical assistance (Glover 1990).

> **27** Empirical evidence confirms that family labor is more productive than hired labor, and that the intensity of supervision by family members affects the performance of hired labor (Frisvold 1994).

> **28** Bhalla and Roy (1989) and Benjamin (1992) have shown that from cross-section analyses (e.g. Berry and Cline 1973, Carter 1984, Newell et al 1997, Kutcher and Scandizzo 1979) tend to overestimate the productivity advantage of smaller farms if soil quality is not specifically accounted for.

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