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

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  • Daniel LaFave
  • Duncan Thomas

Abstract

The farm household model has played a central role in improving the understanding of small-scale agricultural households and non-farm enterprises. Under the assumptions that all current and future markets exist and that farmers treat all prices as given, the model simplifies households’ simultaneous production and consumption decisions into a recursive form in which production can be treated as independent of preferences of household members. These assumptions, which are the foundation of a large literature in labor and development, have been tested and not rejected in several important studies, including, for example, Benjamin (1992). Using multiple waves of longitudinal survey data from Central Java, Indonesia, this paper tests a key prediction of the recursive model: demand for farm labor is unrelated to the demographic composition of the farm household. The prediction is unambiguously rejected. The rejection cannot be explained by contamination due to unobserved heterogeneity that is fixed at the farm level, local area shocks or farm-specific shocks that affect changes in household composition and farm labor demand. We conclude that the recursive form of the farm household model is not consistent with the data. Developing empirically tractable models of farm households when markets are incomplete remains an important challenge.

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  • Daniel LaFave & Duncan Thomas, 2014. "Farms, Families, and Markets: New Evidence on Completeness of Markets in Agricultural Settings," NBER Working Papers 20699, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:20699
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    More about this item

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics
    • J43 - Labor and Demographic Economics - - Particular Labor Markets - - - Agricultural Labor Markets
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets

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