Distortions, Producer Dynamics, and Aggregate Productivity: A General Equilibrium Analysis

The expansion in farm size is an important contributor to agricultural productivity in developed countries, but the reallocation process is hindered in less developed economies. How do distortions to factor reallocation affect farm dynamics and agricultural productivity? We develop a model of heterogeneous farms making cropping choices and investing in productivity improvements. We calibrate the model using detailed farm-level panel data from Vietnam, exploiting regional differences in agricultural institutions and outcomes. We focus on south Vietnam and quantify the effect of higher measured distortions in the North on farm choices and agricultural productivity. We find that the higher distortions in north Vietnam reduce agricultural productivity by 46%, accounting for around 70% of the observed 2.5-fold difference between regions. Moreover, two-thirds of the productivity loss is driven by farms' choice of lower productivity crops and reductions in productivity-enhancing investment, which more than doubles the productivity loss from factor misallocation.