THE ECONOMICS OF AGRICULTURAL LABOR EXCHANGE WITH EVIDENCE FROM INDONESIA

Abstract

In agricultural labor exchange, farmers temporarily pool their labor into teams and complete a task on each team member's plot in succession. Labor time is exchanged between team members under strict reciprocity and without pay. The use of agricultural labor exchange in developing countries is widespread, but has received little attention from economists. This dissertation investigates the motivation for the formation of labor exchange teams by considering the individual farmer's decision to participate. The analysis focuses on the two most prominent motivations for labor exchange: credit and labor market imperfections and the technological benefits of teamwork. A theoretical model of demand for labor exchange under factor market imperfections generalizes existing models of the organization of agricultural production by allowing for returns to teamwork and labor exchange. This generalization accounts for empirically relevant modes of production that were previously ruled out. The model establishes positive marginal returns to teamwork as a necessary condition for labor exchange when non-household labor exhibits moral hazard. The empirical analysis tests the implications of the model using primary data on agricultural households from Indonesia. Production function estimates demonstrate positive returns to teamwork for a sample of rice and corn farmers, establishing the necessary condition for labor exchange. Estimates of the farmer's decision to participate in labor exchange subject to unobserved working capital constraints are estimated for alternative constraint status assignment rules and via the EM algorithm. Results show that the effect of working capital holdings on the probability of participating in labor exchange has the inverted-U shape predicted by the model for working capital constrained households. Also, labor exchange use is responsive to wages in the paid labor market, and is constrained by the local distribution of land and crop choice. These findings imply that labor exchange operates in conjunction with paid labor markets; that labor exchange is a source of productivity growth for poor capital constrained farmers; and that the institution of labor exchange is likely to persist much later into the process of development than suggested by previous studies.