Agricultural factor markets in Sub-Saharan Africa: An updated view with formal tests for market failure

Abstract

This paper uses the recently collected Living Standard Measurement Study–Integrated Surveys on Agriculture Initiative data sets from five countries in Sub-Saharan Africa to provide a comprehensive overview of factor market participation by agrarian households and to formally test for failures in rural markets. Under complete and competitive markets, households can solve their consumption and production problems separately, so that household factor endowments do not predict input demand. This paper implements a simple, theoretically grounded test of this separation hypothesis, which can be interpreted as a reduced form test of market failure. In all five study countries, the analysis finds strong evidence of factor market failure. Moreover, those failures appear general and structural, not specific to subpopulations defined by gender, geography, human capital, or land quality. However, we show that rural markets are not generally missing in an absolute sense, suggesting that market existence is less of a problem than market function.

Farms, Families, and Markets: New Evidence on Completeness of Markets in Agricultural Settings

“…In practice, even with extensive controls, there are potentially unobserved farm-specific characteristics that affect labor demand and are correlated with household demographic composition. These include, for example, land owned, soil quality, plot fertility, farm specific knowledge, and managerial experience, many of which are difficult to measure and typically correlated with wealth and thus household composition (Benjamin, 1992; Udry, 1996, 1999; Dillon and Barrett, 2015). Exploiting panel data, our labor demand model includes farm fixed effects, η h , which absorb all observed and unobserved farm-specific heterogeneity that is fixed over time and affects labor demand in a linear and additive way.…”

“…1 Recent studies that have their origins in this model have made important contributions to the study of distributional impacts of agricultural productivity shocks, technology adoption, and the operation of labor markets (Jayachandran, 2006; Suri, 2011; Kaur, 2015; Mobarak and Rosenzweig, 2014), risk sharing (Townsend, 1994), the impact of microcredit (Kaboski and Townsend, 2011), understanding intra-household resource allocation (Udry, 1996), property rights (Field, 2007), and child labor and household production (Akresh and Edmonds, 2011). More broadly, the effects of policies depend critically on whether or not economic decision-makers behave as if markets are complete (Singh, Squire and Strauss, 1986; Dillon and Barrett, 2015). …”

“…Benjamin discusses the issue at length and notes that both household size and labor demand are likely correlated with unobserved characteristics such as farmer skills, entrepreneurship and wealth. Addressing this concern in studies that use cross-sectional data has been a challenge (see, for example, Lopez 1984, 1986; Jacoby, 1993; Grimard, 2000; Dillon and Barrett, 2015; and additional citations in Behrman, 1999). This paper uses panel data and includes farm fixed effects so that identification is based on changes in labor demand and changes in household size and composition.…”

Labor Productivity and Employment Gaps in Sub-Saharan Africa

“…Because hours or days of labor supplied by hired workers to NFEs are not collected anywhere besides Malawi, per-hour firm level productivity estimates are not included for NFEs. Wage labor returns should not be interpreted as measures of productivity, especially in the presence of market frictions, of which the evidence is strongly suggestive (Dillon and Barrett, 2014). They do offer a lower bound on the marginal revenue product of rented out labor, and they also provide a benchmark against which individuals in an economy can compare returns to self vs. own employment.…”

Smallholders' Land Ownership and Access in Sub-Saharan Africa: A New Landscape?

“…First, with evidence of factor market imperfections (Dillon and Barrett 2014), it is of interest to see if land markets equalize factors and transfer land to more productive and relatively land scarce producers. Second, land markets will operate more smoothly if clear information on land ownership is available at low cost and social norms ensure that a landlord who temporarily transfers land through rental does not risk the loss of this asset.…”