Rethinking the Supply Response to Market Reforms in Agriculture: Household Heterogeneity in Village General Equilibrium Analysis from Mexico

We present a new, village general-equilibrium modeling approach to explain agricultural households’ apparently perverse responses to policy reforms. Most supply-response studies are partial, ruling out the transmission of influences among households. We propose a general-equilibrium approach that integrates individual agricultural household models into a village economy wide model. Simulation results illustrate how changes in staple prices and other policy shocks influence production even in subsistence households facing high transaction costs. Findings offer an explanation for the lack of supply response to lower maize prices in Mexico following NAFTA.