Risk as Impediment to Privatization? The Role of Collective Fields in Extended Agricultural Households

As in the case of agricultural cooperatives, collective fields in extended agricultural households act as an insurance device, by redistributing income between household members. At the same time they entail inefficiencies arising from the incentives to free ride on co-workers efforts. Privatization solves the latter problem but comes at a cost of lower risk-sharing (Carter, 1987). The classic analysis of the trade-off between efficiency and risk-sharing rules out another major risk-sharing mechanism, namely voluntary interpersonal transfers. This paper is a first attempt to merge the two insurance mechanisms: collective production, which is plagued by free riding and income transfers, which are hampered by limited commitment. Privatization of land is shown to interact with incentives to abide by the insurance agreement, so that the tradeoff between risk-sharing and production efficiency may or may not be maintained with income transfers. We show that an increase in the value of the household members’ exit option or a decrease in patience decreases the optimal rate of privatization. With the help of numerical simulations we argue that households of greater size are also more likely to privatize land.