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Abstract

Did the rise in food prices have a long-term impact on agricultural production? Using household-level panel data from seven provinces of Indonesia, we examine whether the 2007-08 food price crisis triggered farm investments. Empirical results show that (i) the food price crisis created a forward-looking incentive to invest, which can increase farm productivity in the long run, (ii) the expectation formation plays an important role in determining the impact, and (iii) the impact differs by the initial wealth; the positive price shock relaxed liquidity constraints among the poor. Implications on inequalities in income and productivity are discussed.

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