Abstract
This chapter explores the link between production specialization and market participation of smallholder agricultural households. The key premise of the chapter is that transaction costs play a fundamental role in production specialization in agriculture, which in turn affects household decisions on market entry and the extent of market participation. The chapter finds evidence to suggest that market entry and participation decisions of farmers with relatively specialized farm operations are influenced by their endowments (land and agricultural capital) and access to input markets (labor and fertilizer), and transaction costs are not as binding a constraint. Market entry and participation decisions of farmers with less-specialized operations are influenced by both transaction costs and production-related factors. Therefore, policies designed to promote market participation are likely to yield the desired results only so far as they are able to incorporate tools addressing their underlying environments.
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