On Price Risk and the Inverse Farm Size-Productivity Relationship

Abstract

The oft-observed inverse relationship between farm size and productivity has elicited several explanations having important policy and theoretical implications. Using advances in the analysis of price risk effects on producer behavior, and a simple two-period model of an agricultural household that both produces and consumes under price uncertainty at the time labor allocation decisions are made, this paper demonstrates analytically that a non-degenerate land distribution and price risk can together produce an inverse relationship, even absent any of the more common explanations. Empirical evidence from Madagascar confirms the plausibility of this intuitive explanation for the phenomenon

Keywords: Agricultural household models, Inverse relationship, Price risk, Madagascar

JEL Classification: D13, O13, Q12