Farm Household Production Theories: A Review of “Institutional” and “Behavioral” Responses

Abstract

This paper reviews major lines of theoretical and empirical research on farm household production choices in developing countries. It provides a wide-ranging literature review of different microeconomic approaches to peasant economy, shedding light on the underlying reasons that lead modern development economists away from the neoclassical framework to study “real people in real environments.” The paper focuses on recent insights into the way peasant households manage the trade-off between income risk and expected returns when making production decisions in the context of weak or missing institutions. Several contributions point out that farm household behavioral responses to market imperfections in low-income settings may generate situations of efficiency losses and “poverty traps.” Yet, the extent to which such vicious circles are generated by the farm household decisionmaking process itself is currently a major object of study of development economics.