Welfare Effects of Scale Transition From Smallholders to Large Farms: A Theoretical Framework

This study develops a theoretical framework to examine the welfare effects of scale transition from smallholders to large farms. Taking hog farming in China as an example, this study focuses on the coexistence equilibrium with both smallholders and large farms and assesses the distributional effects on rural households (independent smallholders, employed smallholders, and quitters), urban consumers, and aggregate social welfare. The simulation findings reveal that the transition to large farms results in long‐term welfare losses for employed smallholsers, as well as rural households as a whole. This outcome is attributed to a reversed income effect, whereby the initial employment gains gradually diminish as the scale of transition progresses. Conversely, urban consumers gain substantial welfare improvements owing to lower retail pork prices, which are driven by the credit advantages and technological innovations of large farms. Additionally, aggregate social welfare improves as consumer surplus outpaces smallholder welfare losses. This research unpacks the intermediary step in the transition from smallholders to large farms and provides theoretical insights for agricultural transitions in developing economies.