Questions more important than you might think: Are small farms in India inefficient?

If you are worried that India’s 1.2 billion (and the world’s many billions) are going to be able to feed themselves, and if you ever wondered if India (and any other agrarian society) has the room to maintain huge economic growth rates, then you probably care about the answer to this question.

It does not have an obvious answer. Small farms actually have some potential advantages. They might supervise less expensively because they use family instead of workers. They might have cheaper credit because they own, not rent, all that land. And if markets work even reasonably well there shouldn’t be any ridiculously gross inefficiencies.

Andy Foster and Mark Rosensweig take a close look, and tell us Indian farms are well out of equilibrium:

We identify the effects of changing farm size on profitability and input use by making use of the fact that over the nine-year period between survey rounds almost 20% of households divided and/or received inherited land because a parent died, thus changing ownership and scale for farmers within the same family.

…Supervisory cost differentials turn out to be large, leading to almost a doubling in the shadow price of labor when a household hires workers relative to when it employs family workers exclusively and works off farm.

Despite this large cost differential and the fact that large farms are more likely to be in the high-cost employment regime, we find that estimated profits per acre, computed based on the theoretically consistent shadow prices of labor, increase when owned land size increases.

Profits are also higher on larger plots within the same farm, indicating pure scale effects. Mechanization is responsible for part of this advantage.

…Large landowners also appear to have a credit advantage, as their efficiency, unlike for small farmers, is unaffected by prior profit shocks.

…The low incidence of both tenancy and land sales in the face of large differences in the returns to land investments suggests that there are significant barriers to land amalgamation in rural India. Our findings thus suggest that understanding the source of these impediments might have large payoffs in terms of improving agricultural efficiency in India.