Farm Size and Productivity: The Role of Family Labor

We draw a theoretical model to demonstrate that small farms achieve lower total factor productivity (TFP) compared with large farms, even though the yield of small farms may be higher. We argue that taking into account family labor modifies the farm size-productivity relationship. We test our hypotheses using geocoded data from 5,645 agriculture farms in Pakistan combined with remote-sensing data to account for farm-specific topographic features. We base our analysis on ordinary least squares and stochastic frontier analysis and find that family labor is the key to understanding the nature and strength of the farm size-productivity relationship. The association of farm size with both yield and TFP turns positive when we measure family labor in terms of market wage rate rather than marginal product of labor. Farm yield decreases by 0.07% with a 1% increase in farm size but is not significantly related to farm size when the family labor cost is measured in terms of market wages rather than marginal product. We find that higher family labor intensity, labor-market distortion due to the notion of family dishonor, and suboptimal crop selection by small farms play a crucial role in this context.