Selection and Absolute Advantage in Farming and Entrepreneurship: - PowerPoint PPT Presentation

Introduction Model Data Extensive Margin Interpretation Intensive Margin Selection Over Time Conclusion Selection and Absolute Advantage in Farming and Entrepreneurship: Microeconomic Evidence and its Macroeconomic Implications Francisco Alvarez-Cuadrado Francesco Amodio Markus Poschke McGill University and CIREQ Oxford November 4, 2019

Introduction Model Data Extensive Margin Interpretation Intensive Margin Selection Over Time Conclusion Question: Are farmers better at farming than others? Why it matters: 1. Recent work argues that selection can explain part of the Agricultural Productivity Gap. ◮ This channel requires that active farmers are indeed the best at farming.

Introduction Model Data Extensive Margin Interpretation Intensive Margin Selection Over Time Conclusion Question: Are farmers better at farming than others? Why it matters: 1. Recent work argues that selection can explain part of the Agricultural Productivity Gap. ◮ This channel requires that active farmers are indeed the best at farming. 2. It is a hard question, because of selection. ◮ We propose a new idea that allows answering it with little structure.

Introduction Model Data Extensive Margin Interpretation Intensive Margin Selection Over Time Conclusion Motivation 1: The Agricultural Productivity Gap (APG) Poor countries: low agricultural productivity, high agr. employment. 100 15 VA per Worker in Non-Agric / VA per Worker in Agric BFA CMR BDI RWA BFA LSO GAB MWI MWI MDG BDI Share of Agricultural Employment CAF ETH CMR MDG 75 TZA GIN LSO PNG ZMB TCD LBR SLE UGA AZE NPL HTI 10 RWA KEN SDN GEO IND ZMB ZWE ALB BEN TJK GIN GHA GEO 50 NGA BGD FJI IRQ KAZ PAK BTN CHN ARM GAB THA MLI MAR TZA KHM IDN AZE WSM THA BWA UZB UGA ZWE MNG PHL HND SEN GTM ALB TON LKA NAM KAZ STP NIC ROU 5 CHN ROU PNG 25 SWZ PRY TUN CPV SRB ETH HTI TJK IRQ TUR CAF MAR NAM CUB MEX SVN GRC JAM CHE GUY DMA DZA MHL BLR TCD IND IDN IRL SYR JAM HND GTM WSM BRA POL SLV BRA CUB BLZ LBR BGD KEN PHL ARM FJI CHL JPN AUT COL TUR LCA OMN UKR NPL PAK PAN DOM MYS LCA POL GRD SDN HRV MEX HRV SEN LKA PAN MDV BWA CRI CHL GRC TUN SRB LVA ARG GHA BTN COL MHL DOM BEL MNE MUS LBN RUS SVN BEN UKR DZA MUS NOR BGR SUR LVA LTU LTU GRD DEU OMN NZL SLE NGA MNG MDV ZAF RUS BMU ZAF PRT AUT ISL IRL NIC CPV DMA CRI CYP SAU ESP BRB ITA DNK JOR URY EST HUN CYP SAU ISR ITA ESP FIN JPN CHE STP SWZ SLV TON BLR ARG FRA FIN ATG CZE BRB FRA DEU SWE DNK CAN AUS NOR KHM LBN MYS EST PRT CZE GBR MLT BEL GBR NLD USA BMU BRN UZB JOR BLZ ATG NZL SWE CAN AUS USA BRN 0 MLI BGR HUN MLT PRY SYR ISR GUY MNE ISL URY SUR NLD 0 6 7 8 9 10 11 6 7 8 9 10 11 Log of GDP per Capita Log of GDP per Capita (Gollin, Lagakos and Waugh, QJE 2014) VA / worker in agriculture relative to non-agriculture: ◮ 1 / 4.4 in Ethiopia versus 1 / 1.3 in the US / Canada. ◮ Observables (hours worked, HK, K, land) account for only about 1 / 3 of the di ff erence.

Introduction Model Data Extensive Margin Interpretation Intensive Margin Selection Over Time Conclusion Motivation 1: A Story of Selection for the APG ◮ Heterogeneity in the population ◮ Di ff erent abilities / skills in agriculture and other activities: heterogeneity in absolute advantage ◮ Sorting according to comparative advantage: ◮ Relative abilities / payo ff s across activities determine choices. ⇒ Farmers reveal high comparative advantage in agriculture. ◮ If absolute and comparative advantage are positively correlated: ◮ The few remaining farmers in US / Canada are the very best. ◮ In Ethiopia, less skillful farmers are also active. ⇒ Average productivity increases as the share of agricultural employment decreases. (Lagakos and Waugh 2013)

Introduction Model Data Extensive Margin Interpretation Intensive Margin Selection Over Time Conclusion Motivation 2: Identification ◮ Objectives: ◮ Identify the correlation between absolute and comparative advantage in agriculture and non-farm entrepreneurship ◮ Clarify its relationship with the underlying distributions of absolute advantages ◮ Identification of a Roy model ◮ Generally impossible without distributional assumptions ◮ Can measure individual productivity in only one activity (Heckman and Sedlacek 1985, Heckman and Honor´ e 1990) ◮ We consider an extended version of Roy ◮ Allow individuals to pursue either one or both activities ◮ Take the model implications to household-level data ◮ Ethiopia, Malawi, Tanzania, Uganda.

Introduction Model Data Extensive Margin Interpretation Intensive Margin Selection Over Time Conclusion Preview of Results 1. Around 1 / 3 of households engage in both agriculture and non-farming entrepreneurship. ⇒ They have weak comparative advantage. 2. These households have systematically higher agricultural productivity than those doing only farming. ⇒ They have high absolute advantage in agriculture. 3. Among those doing both, those with higher agricultural productivity supply relatively fewer hours in that sector 4. Over time, households starting a non-farming enterprise have higher agricultural productivity than those who remain only farmers.

Introduction Model Data Extensive Margin Interpretation Intensive Margin Selection Over Time Conclusion Implications ◮ Evidence suggests a negative correlation of comparative and absolute advantage in agriculture. ⇒ Evidence from within villages shows little support for a selection story driving the APG. ◮ What could generate the observed patterns? ◮ Strong positive correlation between abilities ◮ Higher dispersion of returns to entrepreneurship

Introduction Model Data Extensive Margin Interpretation Intensive Margin Selection Over Time Conclusion Literature ◮ Selection and sorting according to comparative advantage ◮ Roy (1951), Borjas (1987) ◮ Sectoral size and average productivity: Young (2014) ◮ Selection and the APG ◮ Calibration of joint distribution of abilities ◮ Lagakos and Waugh (2013) - US wage data: moderately positive correlation ◮ Adamopoulos et al. (2017) - panel data from China: negative correlation ◮ Rural to urban migration ◮ Hicks et al. (2018) - panel data from Indonesia: positive selection of migrants.

Introduction Model Data Extensive Margin Interpretation Intensive Margin Selection Over Time Conclusion Outline 1. A Simple Model of Selection 2. Data and Descriptives 3. Selection along the Extensive Margin 4. Interpretation and Discussion 5. Choices on the Intensive Margin 6. Selection Over Time 7. Alternative Explanations 8. Conclusions

Introduction Model Data Extensive Margin Interpretation Intensive Margin Selection Over Time Conclusion An Extended Roy Model ◮ Two sectors: agriculture and non-agriculture j = { a , n } ◮ Continuum of households indexed by i ◮ Each household is endowed with a vector of abilities { z a i , z n i } ◮ Distributed according to G ( z a , z n ) with means µ j variance σ 2 j ◮ Absolute advantage in agriculture: z a i ◮ Comparative advantage in agriculture: z a i / z n i .

Introduction Model Data Extensive Margin Interpretation Intensive Margin Selection Over Time Conclusion Household’s Problem ◮ The household is endowed with one unit of time to allocate across activities { l a i , l n i } ◮ Value added in the two sectors � � y a i = κ z a l a i f i (1) � � � � y n i = z n l n = z n 1 − l a i g i g i i ◮ with f ′ ( · ) , g ′ ( · ) > 0 and f ′′ ( · ) , g ′′ ( · ) < 0 and f ′ (0) , g ′ (0) < ∞ ◮ κ captures economy-wide productivity and price di ff erences ◮ Household chooses { l a i , l n i } that maximizes � � � � y i = κ z a l a + z n 1 − l a i f i g (2) i i

Introduction Model Data Extensive Margin Interpretation Intensive Margin Selection Over Time Conclusion Benchmark Case ◮ l j i = { 0 , 1 } , household operates in one sector only ◮ Engages in farming if and only if κ z a i f (1) ≥ z n i g (1) or z a ≥ g (1) i κ f (1) = constant (3) z n i ◮ Mean sectoral productivity in agriculture � z a κ f (1) i dGi za ≥ g (1) z a i � � ≥ g (1) � zn κ f (1) y a ≡ E � i y a i ¯ = (4) � i z n � � κ f (1) dGi � za i ≥ g (1) i zn κ f (1) i ◮ Occupational choice determined by comparative advantage ◮ Sectoral productivities determined by absolute advantages � z a � ◮ Correlation ρ i , z a i determines the relationship between z n i sectoral size and productivity.

Introduction Model Data Extensive Margin Interpretation Intensive Margin Selection Over Time Conclusion Positive Correlation of Advantages in Both Sectors Farmers Entrepreneurs

Introduction Model Data Extensive Margin Interpretation Intensive Margin Selection Over Time Conclusion z a ↑ Decrease in Size of the Agricultural Sector: ¯ Farmers switchers Entrepreneurs switchers

Introduction Model Data Extensive Margin Interpretation Intensive Margin Selection Over Time Conclusion Negative Correlation of Advantages in Agriculture Farmers switchers Entrepreneurs switchers