Farm size and use of inputs: explanations for the inverse productivity relationship

Purpose - The relationship between farm size and land productivity is a hotly debated issue in the study of agricultural economics and development economics. The purpose of this paper is to explore the causes leading to the inverse productivity relationship by examining the relationship between farm size and factor inputs. Design/methodology/approach - With a large panel data set of farm households in China during 2010-2011, this study uses the factor demand models to examine the relationship between farm size and per-mu labor and non-labor inputs while employing a stochastic frontier production function in determining the difference of labor efforts in farming operation across farm sizes. Moreover, the models for value-added margins and profits are used to further determine producer behavior of small-size farms. Findings - Results of this study show that, as compared to larger farms, smaller farms not only utilize more labor and non-labor inputs per mu, but also benefit from a higher labor effort. Moreover, smaller farms concentrate more on grain output and cash costs while focusing less on the family labor input costs in an effort to maximize value-added margins rather than profits. The higher yields on smaller farms are thus a result of the utilization of a relatively higher level of labor and non-labor inputs along with skilled-oriented precision farming technology. The inverse productivity relationship is explained by the behavior of small-size producers with employment constraints, leading to smaller farms generating a higher yield than larger farms. Originality/value - While Sen (1966), Feder (1985), Eswaran and Kotwal (1986) and others have theoretically derived the causal relationship between the incomplete factor markets, especially incomplete labor markets, and the inverse productivity, empirical studies to test the causal relationships are limited. In particular, a solid foundation based on an empirical analysis is lacking when it comes to explaining the inverse productivity in China. Results of this study are expected to have significant policy implications in terms of the understanding of small-size producer behavior and the associated mechanism underlying the inverse relationship between farm size and land productivity.