Supervision And Transaction Costs: Evidence From Rice Farms In Bicol, The Philippines
Labor markets in all economies are subject to transaction costs associated with recruiting, monitoring and supervising workers. The level of transaction costs affects labor and land contract choices and family labor advantages. Rural labor markets in developing economies, where institutions such as labor and contract law and formal employment assistance mechanisms are not in place, are regarded to be particularly sensitive to transaction cost conditions. A number of studies of contract choice support this contention. The inherent difficulty of measuring transaction costs, however, has limited studies on this topic. In this paper, we analyze supervision activities reported in a cross-section survey of rice farmers in the Bicol region of the Philippines. This survey is unique because it provides supervision data at the farm task level in addition to information on production activities and household characteristics over a range of institutional conditions. It also provides barangay (village) level variables that help us to quantify institutional conditions. The data show that family workers either work or supervise, but do not do both at the same time. This is consistent with a simple optimization model in which supervision intensity increases the productivity of hired workers, which is assumed to be lower than that of family members due to the transaction costs. The model predicts that supervision intensity will increase with transaction costs. We use different institutional conditions to proxy for transaction costs, and estimate the demand for supervision time for four different classes of rice production tasks. The estimation strategy controls for selectivity due to two sources: not all farms use hired labor, and not all farms that use hired labor actually supervise. The results indeed show a positive effect of transaction costs on supervision intensity. We then extend the analysis to a farm efficiency specification to test the proposition that supervision activities improve farm efficiency. This framework allows us to relate institutional conditions to farm efficiency directly and indirectly through their effect on supervision activities. We find that transaction costs have a negative direct effect on farm efficiency, but this is partially offset by increased supervision intensity which enhances efficiency. The results enable us to associate institutional conditions with transaction costs and to draw policy inferences regarding the value of improved institutional conditions.
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