Agricultural Factor Markets in Sub-Saharan Africa: An Updated View with Formal Tests for Market Failure

Abstract

a b s t r a c tThis 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.

Does mixed crop‐livestock farming lead to less diversified diets among smallholders? Evidence from Laos

“…Another important explanatory variable is food purchased from food markets. In most low‐ and lower middle‐income countries, food markets are not well developed and asymmetric information exists (Dillon and Barrett, ). Additionally, most of these countries have high levels of subsistence agriculture (Morton, ).…”

Smallholder participation in vegetable exports and age‐disaggregated labor allocation in Northern Tanzania

“…An important assumption of these models is related to the separability of the production and consumption sides of estimated models (Lopez, ; Singh et al., ), which allows for a distinct analysis of the off‐farm, family on‐farm, and hired labor decisions (Wang et al., ). In many developing countries, factor markets fail, which questions this assumption and can lead to a situation of nonseparability (Dillon and Barrett, ; Lopez, ). In this situation, households’ production and consumption decisions are affected by households’ preferences (Le, ) and should thus be considered simultaneously (Lopez, ).…”

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

“…None of our conclusions depend on the functional form of demographics in the model. (1992), Udry (1996Udry ( , 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.…”

“…2 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 discussed the issue at length and noted 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, e.g., Lopez (1984Lopez ( , 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.…”