Factor Market Activity and the Inverse Farm Size-Productivity Relationship in Tanzania

Although the inverse farm size-productivity relationship (IR) is sometimes used to motivate arguments in favour of smallholder-led agricultural development, it remains unclear what drives this relationship. It may be attributed to market imperfections that compel small farms to use land more intensively than large farms. Using a three-wave longitudinal household survey from Tanzania, we examine whether the intensity of the IR is related to local factor market activity for land, labour, credit, and animal and machine traction. The IR holds in Tanzania when family labour is either not counted or valued at its shadow cost, though it disappears when family labour is valued at the prevailing local agricultural wage rate. Moreover, the IR is significantly weakened in regions with relatively active agricultural factor markets, such as for land and mechanization services. This suggests that the IR is at least partly driven by imperfections in rural factor markets. As household participation in agricultural factor markets continues to rise, the IR may be expected to weaken or even reverse.