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Abstract

The opportunity to work in the off-farm labor market allows farmers to smooth consumption in the face of a negative weather shock. This allows farmers to make production choices that have higher average returns, and greater risk. I develop a two-period dynamic programming model to explain the relationship between fertilizer demand and off-farm labor markets for a risk-averse farmer. I use a well-known sample of farmers in the semi-arid tropics of India to test the model. I show that fertilizer demand increases with the depth of the off-farm labor market. Controlling for exogenous weather risk, farmers use more fertilizer the lower the unemployment rate and the higher the share of nonagricultural work in total off-farm labor. The results have important policy implications, suggesting that labor markets and farm production are complementary in risky production environments.

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