Are There Too Many Farms in the World? Labor Market Transaction Costs, Machine Capacities, and Optimal Farm Size

We show that labor market transaction costs explain why the smallest farms are more efficient than slightly larger farms in most low-income countries and that increases in machine capacity with operational scale result in the globally observed rising upper tail of productivity. We find evidence consistent with these mechanisms using Indian data, and we show that if all Indian farms were at the minimum scale required to maximize the return on land, the number of farms would be reduced by 82% and income per farm worker would rise by 68%.

Automated summary

Labor market transaction costs explain the higher efficiency of the smallest farms compared to slightly larger farms in low-income countries, while increases in machine capacity and operational scale result in the rising upper tail of productivity observed globally.