Farm profits, prices and household behavior

Area of Science:

• Agricultural Economics
• Development Economics
• Econometrics

Background:

• The agricultural household model is central to development economics, integrating production and consumption decisions.
• Empirical testing of simultaneous farm-household choices is complex.
• Most studies assume complete markets, simplifying decisions recursively.

Purpose of the Study:

• To develop and implement a novel consumption-based approach for testing the complete markets assumption in farm-households.
• To identify farm-households consistent with or deviating from the complete markets assumption.
• To provide a more robust method than production-side tests.

Main Methods:

• Developed a new empirical test focusing on household consumption patterns.
• Applied the test to data from rural Indonesian farm-households.
• Compared consumption-based tests with traditional production-based tests.

Main Results:

• The recursion assumption, indicative of complete markets, was not rejected for larger farmers.
• The recursion assumption was rejected for small farmers.
• The consumption-based test effectively distinguishes between farm-households under different market conditions.

Conclusions:

• Farm-households' adherence to the complete markets assumption varies with farm size.
• The new consumption-based test offers a practical tool for identifying behavioral responses to market incompleteness.
• Findings have implications for understanding development strategies in diverse agricultural settings.