The Equilibrium Impact of Agricultural Risk on Intermediate Inputs and Aggregate Productivity

I consider the aggregate impact of low intermediate input intensity in the agricultural sector of developing countries. In a dynamic general equilibrium model with idiosyncratic shocks, incomplete markets, and subsistence requirements, farmers in developing countries use fewer intermediate inputs because it limits their exposure to uninsurable shocks. The calibrated model implies that Indian agricultural productivitywould increase by 16% if markets were complete, driven by quantitatively important increases in both the average real intermediate share and measured TFP through lower misallocation. I then extend the results to consider the importance of risk in other contexts. First, the introduction of insurance decreases cross-country differences in agricultural labour productivity by 14%. Second, scaling the introduction of improved seeds to decrease downside risk reduces inequality by reallocating resources from rich to poor farmers via equilibrium effects. This reallocation substantially increases aggregate productivity relative to what would be expected from extrapolating the partial equilibrium impact.

Automated summary

The study finds that farmers in developing countries use fewer intermediate inputs due to concerns over uninsurable shocks. The model suggests that Indian agricultural productivity would increase by 16% if markets were complete. Risk also plays a significant role in other contexts, with insurance introduction decreasing cross-country differences in agricultural labor productivity by 14%.