Abstract
AbstractResearchers have employed farm household models (FHMs) for policy analysis under the separability assumption. However, separability can fail, and the household's production and consumption decisions become simultaneous. Using 5 years of household data, the separability assumption among Ghana's cocoa-producing households is tested via heterogeneity of household adult males and females, household children, and hired and exchange labor. Results show labor is heterogeneous, implying a lack of separability. Simulation analysis also shows that ignoring nonseparability leads to an underestimation of policy effects. Thus, nonseparability in production and consumption decisions must be incorporated in FHMs developed for Ghanaian cocoa-producing households.
Highlights
Researchers have employed farm household models (FHMs) to examine (1) the impact of alternative policies on farm household welfare, (2) the response by farm households to policies, and (3) market effects of policies targeted at farm households and spillover into other segments and subpopulations of the economy (Dillon and Barrett, 2017; Singh, Squire, and Strauss, 1986)
FHMs have been solved sequentially
Using the Cocoa Livelihood Program (CLP) development program as an example, the study simulates its effects in Ghana under both the separability and nonseparability assumptions on market prices and household welfare to illustrate the bias in results when separability is misspecified
Summary
Researchers have employed farm household models (FHMs) to examine (1) the impact of alternative policies on farm household welfare, (2) the response by farm households to policies, and (3) market effects of policies targeted at farm households and spillover into other segments and subpopulations of the economy (Dillon and Barrett, 2017; Singh, Squire, and Strauss, 1986). Two main conditions that lead to the breakdown of FHM separability cited in the literature are (1) incomplete and noncompetitive markets (Benjamin, 1992; Dillon and Barrett, 2017; LaFave and Thomas, 2016) and (2) imperfect substitution between family and hired labor in the farm production process (i.e., labor heterogeneity) (Deolalikar and Vijverberg, 1987; Singh, Squire, and Strauss, 1986). The former is the most common condition for the breakdown of separability, many studies have revealed that both market imperfections and labor heterogeneity can lead to the breakdown of separability These studies compare an implied marginal value product of labor versus observable market wages via estimating either production or cost functions (Bhattacharyya and Kumbhakar, 1997; de Janvry and Sadoulet, 2006; Jacoby, 1993; Lambert and Magnac, 1994; Skoufias, 1994). Using the CLP development program as an example, the study simulates its effects in Ghana under both the separability and nonseparability assumptions on market prices and household welfare to illustrate the bias in results when separability is misspecified
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