Market integration and separability of production and consumption decisions in farm households

I study to what extent farm household’s production decisions are dictated by their consumption preferences – widely known as the separability hypothesis – and explore how this is related to market integration. My empirical approach is derived from a theoretical insight that if household production decision is independent of its consumption preferences, the household’s tastes for different crops should not affect household land allocation across the crops, and the extent to which the crop tastes affect land allocation depends on the level of trade costs. I implement this test using a very rich household panel data on production and consumption from Ethiopia, which coincide with a period of massive rural road construction. I estimate household crop tastes from their preference function and show that these tastes significantly affect household land allocation across crops. This effect significantly decreases with proximity to markets and with improvement in market integration due to construction of new rural roads.