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Trade Costs and Household Specialization: Evidence from Indian Farmers- Nick Li

Date & Time:
February 27, 2015 | 3:00 pm - 4:30 pm
Nick Li, University of Toronto

Farmers in developing country produce a large fraction of the goods they consume. I use Indian household survey data from 1987-2009 to look at how prices and trade costs affect the decisions of Indian households about whether to farm and what to farm. I document substantial heterogeneity across Indian districts in the production, buying and selling behaviors of farmers and a large decline in the importance of home-produced consumption between 1987 and 2010 driven by exit from farming and increased specialization of farmers. I formalize these empirical patterns by combining a Roy model of occupational choice with a Ricardian trade model for agricultural varieties. Comparative advantage between farming/non-farming and comparative advantage across locations for crop varieties interact with trade and marketing costs to shape farm activity. I use the expansion of the Public Distribution system in the 1990s and 2000s to examine how marketing frictions affect farm production decisions and find evidence consistent with the model. The findings highlight the impact of a farmer “consumption advantage” on agricultural productivity in the presence of high marketing and trade costs and suggest large welfare gains for individual farmers from market integration compared to autarky.

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