The Microeconomics of Agricultural Development: Risk, Institutions, and Agricultural Policy

Assertions of pervasive inefficiency in the behavior and organization of developing agriculture are found to be based on unsound methodologies. Models apparently based on expected utility theory are theoretically flawed and use highly restrictive assumptions that make them largely irrelevant for explaining actual decisions. When a more appropriate model is applied to the case of the green revolution in the Philippines, the hypothesis that loss aversion impedes adoption of new technology is rejected. Common assertions about the inefficiency of agricultural institutions are also found wanting. The risk-bearing theory share- tenancy, which is thought to imply high agency costs associated with effort shirking, cannot explain observed tenant shares. Once the disadvantages of fixed-lease contracts are recognized, sharing is plausibly second-best efficient. The purported inefficiency implied by the inverse relationship between farm size and yield per hectare also dissipates once the endogeneity of farm size is accounted for. In as much as efficiency can explain the stylized facts of behavior and organization in developing agriculture, policy recommendations based on misplaced exogeneity should be viewed with considerable skepticism.