Factor market participation and tests for separability in Afghanistan

Using nationally representative data from repeated cross section surveys conducted in 2011/12, 2013/14, and 2016/17, we test for separability in the household model and analyse household factor market participation in Afghanistan. Estimates of a household labour demand model and tests for separability reject the null hypothesis that household labour supply and demand decisions are separate. The fact that the magnitude and quantity of labour demanded by the farm household is strongly influenced by the household endowment of labour can be interpreted to mean that there exist potential market failures in multiple markets in Afghanistan. Exploring input market participation, results reveal that ownership of information and communication technologies and transport assets by households has a strong positive influence on the use of inputs. In addition, households living in communities with better access and within a closer radius of markets are more likely to participate in factor markets and spend more on purchased inputs. Standard factors such as household socio-demographic and socio-economic factors were also observed to have an important influence on factor market participation: household size, literacy and education; land endowments and quality; off-farm income; and ownership of farming assets such as tractors, oxen and livestock, are significant determinants of participation and expenditure on inputs. The analysis allows observed transaction costs to be endogenous using instrumental variables and employing a control function approach. The endogeneity of ownership of ICT and transport equipment in fertilizer and chemical, and tractor rental markets is confirmed (we reject endogeneity in the case of hired labour). Correcting for endogeneity bias revealed a negative association between the error terms in the reduced form and structural model, but the main results were maintained.