Trade Adjustment Costs in Developing Countries: - World Bank ...

Barriers to Exit from Subsistence Agriculture 91against 40.7 per cent for non-sugar farmers and 30.8 per cent for ‘always-sugar’farmers. This indeed suggested large gains from adopting the cash crop, butKennedy’s result had anomalies (for example the fact that switchers had final incomesvastly in excess of that of always-sugar growers), did not quite control forselection (the two may be related), and was partly driven by an artificially highsubsidized producer price of sugarcane.In general, the analysis of income differentials between modes of production—subsistence versus market—requires two ingredients. First, there must be carefulcontrol for selection on observables (individual characteristics). Second, it is possiblethat the mode of production affects not only the level of income, but alsothe return to factors of production. For instance, when the market takes the formof large foreign buyers offering out-grower contracts, an increasingly prevalentmode of integration into commercial agriculture (see World Bank, 2008, Chapter5), contractual requirements may be easier to understand and satisfy for farmerswith some education. The return to education is thus likely to be higher for contractfarmers than for subsistence ones, and this should be taken into accountwhen explaining income on the basis of production regime and individual characteristics.Taking into account differentials in factor returns in addition to income levelsmeans that in samples including commercial and subsistence farmers, incomeequations should have the following form. Let i index farmers, and let y i1 and y i2be income under the market and subsistence regimes respectively. The incomeequations arewhere Xi is a vector of individual characteristics. However, the econometriciancan never observe both (1) and (2) at the same time. Observed income is equal toeither y i1 and y i2 , depending on the value of a switch variable I i :(1)(2)(3)The value I, of is itself determined by individual characteristics through a selectionequation of the formThe reader will have recognized a so-called ‘switching-regression’ problem whoselogical structure is close to that of Heckman’s selection model, but with an importantdifference. Namely, here the income of individuals not participating in themarket can be considered as observed if self-consumed output is valued at marketprices (this may be a trickier assumption than it looks, though—more on this below).(4)