On Price Risk And The Inverse Farm Size-Productivity Relationship

The oft-observed inverse relationship between farm size and productivity is generally explained by labor market imperfections. Although other explanations exist (e.g., size-sensitive cropping patterns and variable soil quality), the literature ignores uncertainty as an explanation. Using a simple two-period model of an agricultural household that both produces and consumes under price uncertainty at the time labor allocation decisions are made, this paper demonstrates analytically that an inverse relationship may exist, even absent any of the more common explanations. A simple data exercise suggests the plausibility of temporal price risk as an explanation for this phenomenon.