Land Ownership (DR: 445 – 462) → Relationship between land size and productivity (today’s class) → Efficiency and rental markets in agriculture (next class)

Ownership of land: -Large scale modern farming or ranching -Plantation agriculture -Latifundia -Communal farming -Collectivized agriculture -Family farms

From a pure productivity standpoint: 1)Do small farms have a production function that lies beyond that of large farms? Or: Is there an “Inverse Relationship” between farm size and productivity? Difficult concept for two reasons: a)Large and small farms do not use the same inputs of production b)Problem of valuing non-monetized inputs such as family labor 2) Do small farms produce an output per acre that is closer to the “efficient market” output than large farms? Difficult concept too for: Several markets in agriculture are inefficient

The well-known trade off: Scale economies in large plots have to be weighted against efficiency gains from saving in “agency costs” from having small plots farmed by family members Y L Opportunity Cost for Family Labor Opportunity Cost for Employer Per-Acre Production Function Imperfect Labor Markets and small-farm productivity assuming unemployment L*L**

Can trade off be resolved if small landowners “pool” their land? Depends: If source of returns to scale is, for example, “large-scale marketing”, then, the answer is yes If, however, returns to scale lie at the “production level” then the answer is no Why? A simple argument based on moral hazard: additional effort by one farmer creates additional output, but the additional output is shared → undersupply of effort (free-rider problem).

Empirical Evidence Productivity gains from incentives outweigh technological returns to scale However, small plots could be of higher quality for a myriad of reasons I.e., Good land more fragmented because of inheritance pressures, farmers who sell land in distress sell off the relatively less fertile part of their holdings Moreover: productivity differentials may be smaller in high-risk environments (Rosenzweig – Binswanger (1993))

Can productivity gains be realized via: a)Land sales Very thin market due to credit market imperfections b)Land reform Problems (post- reform scenarios): - lack of ownership rights→ no collateral→no credit - collective land →incentive problems - land ceilings (can these be enforced?)

South Korea Land reform after WW II Transfer of land from: a)Japanese landlords to peasants b)Domestic landlords to tenants Via sales at low prices Beneficiaries: Two thirds of the rural population “Success” because: -Landlords were politically weak - Land was not broken up and same farmers remained - Agricultural output ↑ annual rate of 4%

Mexico Land Reform after 1910 revolution Transfer of land from landlords to the state In turn: transferred to: a)Small private owners b)Communal farms (“ejidos”) Problems: -aristocracy infiltrated the government - government kept land reforms alive for keeping peasants under control - government controlled credit and input supplies → Ill-defined property rights and free rider problems → agricultural output stagnate Next class: Risk – coping & contractual arrangements in agriculture (DR: 213 – 244))