Modern Value Chains and the Organization of Agrarian Production

Empirical studies of agrarian production in developing countries often find that small farms possess a productivity advantage over larger farms. Eswaran and Kotwal (1986) famously derive this inverse farm‐size/productivity relationship from the structure of agrarian production. The focal prediction of their model is that, in otherwise equivalent economies, a more egalitarian land distribution raises both output and producer welfare. The traditional (spot) procurement system implicit in the Eswaran and Kotwal model, however, diverges fundamentally from modern (contractual) procurement practices. We therefore develop a new model of agrarian production in order to determine whether the introduction of a modern value chain alters the welfare effects of land redistribution. The inverse farm‐size/productivity relationship persists in our model, but we find that more egalitarian land distribution leads to nonmonotonic changes in producer welfare. We also find that the introduction of a modern sector can harm the laboring classes.