Heterogeneity, Measurement Error, and Misallocation: Evidence from African Agriculture

Abstract

Standard measures of productivity display enormous dispersion across farms in Africa. Crop yields and input intensities appear to vary greatly, seemingly in conflict with a model of efficient allocation across farms. In this paper, we present a theoretical framework for distinguishing between measurement error, unobserved heterogeneity, and potential misallocation. Using rich panel data from farms in Tanzania and Uganda, we estimate our model using a highly flexible specification in which we allow for several kinds of measurement error and heterogeneity. We find that measurement error and heterogeneity together account for a large fraction – perhaps two-thirds to three-quarters -- of the dispersion in measured productivity. We suggest that the potential for efficiency gains through reallocation may be relatively modest.