Rural market imperfections and the farm size-productivity relationship: Evidence from Pakistan

The subject of this article is the relationships between farm size and productivity and between farm size and profitability in the developing countries. The recent controversies over the inverse size-output relationship are reviewed, and a framework is provided that explains the inverse relationship based on plausible assumptions about imperfections in the markets for labor, land, credit and risk. From this framework, a set of testable hypotheses are derived. The hypotheses are tested on recent farm-level panel data from Pakistan. A strong inverse relationship between farm size and yield is present in the sample, even when household fixed effects are used to account for unobserved heterogeneity, Moreover, the suggested market imperfections framework is consistent with the data. (C) 1998 Elsevier Science Ltd. All rights reserved.