Leveraging Custom Hire Markets for Increasing Scale and Productivity

Agriculture remains central for the lives of a large portion of the world population in developing countries. However, stagnating agricultural productivity has prevented transformational development to livelihoods of smallholder farmers. A key possible reason for this stagnation is the lack of farm mechanization. Rental markets for agriculture are a key mechanism via which smallholder farmers access mechanization. These markets are largely serviced by richer farmers who own capital equipment and operate in these markets as service providers. Recently, governments in the developing world have been increasingly intervening in formal equipment rental markets to incentivize mechanization of smallholder farmers. However, there is no systematic evidence on how the presence of rental markets could impact smallholder farmers' productivity, agricultural wage workers, and production techniques, and how the informal and formal rental markets would interact to provide services to smallholder farmers. This project aims to fill this gap.

To do so, the researchers have partnered with one of the biggest providers of rentals of agricultural equipment in India. This provider displays a few characteristics that stand out, in comparison with informal renters: service is assured to arrive quickly, and prices do not fluctuate across the agricultural season. Moreover, it provides an enforceable contract and a quality controlled service at a subsidized cost. The researchers plan to implement a RCT over locations to which the provider will become available during 2019, in the state of Karnataka. Randomization will happen in two stages, firstly at the village and then at the farmer level. The timing of accessibility to the service will be randomized, in order to study its impact on adoption of technologies, crop choice, yields, and a number of household outcomes. In addition, within each village, the cost of the service will be randomly subsidized (to different degrees) for some households. This will allow the researchers to identify potential barriers to service requests related to financial constraints and experimentation costs, and the presence of general equilibrium effects and spill-overs.

This project is uniquely positioned to properly identify the effects of formal rental markets on productivity, and frictions that may prevent firms entry into the rental service provision, or how formal and informal markets interact with welfare consequences for their consumers. Currently, state-governments in India are engaged in subsidizing equipment purchases, as well as rental costs. By better understanding the impact of these policies, the public debate on cost-effective ways of improving the livelihoods of smallholder farmers may be better informed.



Julieta Caunedo

University of Toronto

Namrata Kala

Massachusetts Institute of Technology