Agricultural Household Models Empirical Evidence Flashcards
what is ‘recursive property’
independence of production and consumption decisions in barnum-squire model allow it so be solved in sequential way
steps of recursive property
1) production function estimated
2) demand functions for consumption choices in utility function are estimated
3) interaction between production and consumption decisions can be traced on bases of individual responses which have been estimated
key policy question
whether changes to prices and wages represent a benefit or a cost to particular household
net seller vs net buyer
- if production < consumption, household is net buyer of food
- if labour supplied < labour needed by plot, household is net employer
pure consumer vs household farm model
pure consumer
- household budget fixed
household farm
- household budget endogenous
profit maximising rules
hire inputs at point where marginal value product (MVP) of input = input price
in household that uses labour both to produce on family far and to sell in market…
may allocate mode labour to on-farm production and less to wage work
OR
continue to supply labour to market while hiring workers needed to expand staple production and maximise profits
key motivation for ahm is…
policy analysis
- resolve paradox of positive own-price elasticity of demand for food in farm households
- increase in price leads to increase in consumption
- resolve puzzle of slow marketed-suplus responses to food-price changes
- increase in price doesn’t necessarily lead to increase in supply
what is farm price policy
level at which agricultural terms of trade are set has wide implications for both efficiency and equity
in 4/7 studies reviewed by Singh, Squire and Strauss (1986)…
consumption effect was large enough to significantly dampen increase in marketed surplus of crop whose price rose
- may negatively affect urban consumers, agro-industry processors and exporters
Singh, Squire and Strauss (1986) results on elasticities
1) positive response indicates profit effect has offset traditional negative effect of income predicted by standard consumer demand theory
2) positive cross-price elasticities
- profit effect increases total expenditure
3) positive marketed surplus
- total output response large enough to offset increased household consumption
4) negative labour supply
- suggest strong profit effect and that leisure is normal good
Singh, Squire and Strauss (1986) results on profit effect elasticities w.r.t. agricultural prices
1) traditional demand models predict decline
2) change coefficient sign in 4 cases
- traditional models due to negative income effect
- ahm positive because of positive profit effect so increase in consumption
3) traditional demand model increase in price reduces consumption of that good and leisure, implies increase in family effort
- ahm predicts negative response, increase in leisure
Singh, Squire and Strauss (1986) results on profit effect elasticities w.r.t. wage rates
1) fewer signs change but magnitudes do
2) traditional model
- increase in wage implies increase in income
- results in positive demand response for agri and non-agri goods and negative of inelastic response of household labour supply
3) ahm
- partially offset by increase in wage bill which affects production and lowers income
- demand dampened or offset, while labour supply becomes positive or more elastic
two types of ahm
separable
- assumes complete and perfectly competitive markets
non-separable
- there are market failures (missing or imperfect markets)
key assumption of most ahm is that household can…
- obtain perfect substitutes for family labour in local labour markets
- sell its own labour at given market wage
