Nonseparable farm household decisions in a computable general equilibrium model

Emerging empirical evidence and microeconomic theory suggest strongly that, in many developing country settings, farm household production and consumption decisions are 'nonseparable'; that is, the farm household cannot be viewed as a separate or independent profit-maximizing producer and utility-maximizing consumer. The existence of such non-separability indicates the presence of market imperfections or failures that may have important policy implications. For example, depending on the nature of the market imperfections, there may be 'threshold' effects whereby policy changes have no effect on household behavior until the change is 'large' in some measure. In this environment, policy analysis assuming the existence of perfect markets may badly misstate the impact of policy changes on producer behavior and household welfare. This paper extends the existing literature on nonseparable household models in two ways. First, we develop a household model with transaction costs in which the choice of market 'regime' for food production (surplus, self-sufficiency, or deficit) is endogenous; that is, not imposed exogenously, as in existing empirical simulation models (de Janvry, Fafchamps, and Sadoulet). Second, we embed this household model, which is formulated as a mixed-complementarity problem, in an economywide computable general equilibrium (CGE) model. A partial-equilibrium framework will miss important factor and product market linkages. Simulations with a model based on data for a stylized, low-income, sub-Saharan African country show that the proposed formulation enhances our ability to analyze the impact of exogenous changes on African farmers.