Shadow Wages, Allocative Inefficiency, and Labor Supply in Smallholder Agriculture

Abstract

This paper introduces a method for estimating structural labor supply models in the presence of unobservable wages and deviations of households' marginal revenue product of self-employed labor from their shadow wage. This method is therefore remarkably robust to a wide range of assumptions about labor allocation decisions in the presence of uncertainty, market frictions, locational preferences, etc. Data from rice producers in Cote d'Ivoire reveal significant, systematic differences between shadow wages and the marginal revenue product of family farm labor, deviations strongly related to household characteristics, particularly land/labor endowment ratio. Adjustments for estimated allocative inefficiency lead to more plausible and precise parameter estimates of the structural household labor supply equation.

JEL Classification: O1, J0, C3, Q1