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Skill Investment, Farm Size Distribution and Agricultural Productivity

Cai, Wenbiao (2011): Skill Investment, Farm Size Distribution and Agricultural Productivity.

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This paper addresses the question why agricultural productivity is so low in poor countries. World Census of Agriculture reveals that agricultural production is of much smaller scale in developing countries. I construct a two-sector OLG model where agricultural production is carried out by heterogeneous farmers. At the farm level, optimal scale and productivity is tied to the farmer's idiosyncratic skill, which can grow over time as a result of optimal investment. At the aggregate, self-selection determines the average skill of farmers and hence the measured agricultural productivity. The calibrated model can explain almost all of the differences in agricultural productivity between the 80th and 20th percentile countries in the sample. Endogenously generated farm size distributions are close to the actual ones as well.

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