Risk, Farm Ownership, and International Productivity Differences

Agricultural labor productivity differences between the richest and poorest 10% of countries are approximately twice as large as aggregate productivity differences. I propose a theory in which the under-utilization of intermediate inputs amplifies sector neutral productivity (TFP) differences in the agricultural sector of low-income countries. The key assumption is that farm input decisions cannot be considered separately from the farmer's consumption decisions. In the face of incomplete markets and idiosyncratic productivity shocks, risk averse farmers choose inputs to maximize expected utility instead of expected profits, causing poor farmers to put greater weight on bad potential outcomes when choosing inputs. In the calibrated model, a factor of 4 difference in sector neutral TFP generates a factor of 16 difference in agricultural output per worker.