Agricultural misallocation, occupational choice and aggregate productivity

Project overview

Project lead: Jan Grobovsek, University of Edinburgh

Start date: 1 September 2014

End date: 31 August 2017

Research Council project page

Compared to advanced economies, most of the Least Developed Countries (LDCs) feature extremely low agricultural labour productivity, while productivity in non-agriculture is only modestly low.

This low agricultural productivity can be partly explained by misallocation of production factors, in particular of land across farms – e.g. some farms use too much land and others too little. When comparing incomes of workers in agriculture and non-agriculture, it is difficult to understand why so many workers remain in agriculture, indicating misallocation across occupations.

This research project first identified causes of this misallocation. Second, it intended to understand how policies that diminish misallocation could change agricultural, non-agricultural and, ultimately, aggregate productivity i.e. by how much could they potentially increase GDP. The team were also interested in the welfare effects of such policies on individuals with distinct characteristics (by skill, wealth, gender, age, occupation, etc.). Who stands to gain and who may lose?

Conducting research in Ethiopia and Uganda –¬†¬†countries which are both categorised by a high fraction of land subject to insecure tenure and underdeveloped financial markets – the team collected data via a social survey.¬†Research used structural general equilibrium model economies for analysis. In such models, decisions of distinct individuals and the formation of prices are all interdependent. This is crucial, because the project’s proposed policy changes may alter the decisions of many individuals, which in turn affects relative prices and creates even more economic shifts. The approach incorporated such feedback effects and is hence an ideal tool to understand what would happen if policies were to change.