Rainfall, selection, and agricultural productivity

Project Active from to Firms

Developing countries have a low income per capita and low total factor productivity, relatively more so in the agricultural sector. Even after accounting for differences in labour inputs or incorrect measurement, this “agricultural productivity gap” remains large. In explaining this puzzle, the most recent research highlights the role of sorting and selection of workers with different ability across different sectors. Low productivity traps many individuals with relatively low farming skills into agricultural employment. At the same time, frictions in the land market may disproportionally hurt the most productive farmers, possibly forcing them out of agriculture. A crucial ingredient of these theories is the presence of heterogeneity in abilities or skills in and out of agriculture that are typically unobserved.

This project aims to identify the relationship between ability in and out of agriculture, and entrepreneurship in particular. By doing so, we will provide more solid ground to the theories of selection and sorting that can explain the agricultural productivity gap. This has implications for two categories of government policies:

  • Programmes that encourage mobility across sectors: if those farmers that leave agriculture are relatively unsuccessful entrepreneurs, favouring their mobility towards non-agriculture can be detrimental to welfare. The opposite is true if the marginal farmer is instead highly productive outside of agriculture.
  • Business training and skill development programmes: understanding the relative entrepreneurial ability of those farmers that transition out of agriculture will help to identify the correct target population for these programmes.

These issues are particularly relevant for the African continent, which has the highest share in the world of adults in the process of starting or running new businesses. To identify the relationship between farming and entrepreneurial ability, we will use data from the World Bank Living Standards Measurement Study for four countries: Ethiopia, Malawi, Nigeria, and Uganda. This study follows and records information on the same set of households for several years. We plan to exploit negative rainfall shocks as triggers of transition out of agriculture into entrepreneurship. We hypothesise that the observed patterns of transition and their heterogeneity can inform whether entrepreneurial ability increases more or less than proportionally with farming ability, shedding light on the relationship between the two.