Labor elasticities, market failures, and misallocation: Evidence from Indian agriculture

This article presents evidence of misallocation across households in rural Indian agriculture. I show that household demographics predict own farm labor demand for smallholder farmers but not non‐smallholder farmers. A simple model of labor allocation predicts a clear consequence of this duality: smallholder farmers will reallocate labor across plots less in response to price changes than non‐smallholders. Detailed household panel data confirms this theoretical prediction. Three additional facts suggest that a lack of off‐farm labor opportunities may be partly responsible for the behavior of smallholders, leading smallholders to over allocate labor to agricultural production. First, smallholders report fewer hours of involuntary unemployment when their own crop prices increase. Second, yield is substantially higher for smallholders on plots of the same size. Finally, estimated marginal revenue products of labor are consistently lower for smallholders.