Abstract: This paper documents a novel fact showing the existence of non-homotheticities in production. Using data on living standards for agrarian households across the world, I show that in developing economies, poorer households devote a larger share of their land towards producing staple foods relative to wealthier households. I argue this pattern occurs due to the non-separability of consumption preferences and production choices caused by frictions in exchange markets for food. Using detailed household-level data from rural Vietnam, I first provide empirical evidence validating my non-separation hypothesis as the driver for non-homothetic production. I then estimate a quantitative model of crop choice when consumption preferences directly impact production choices and use this model to quantify the effects of exchange market frictions. The results show that removing frictions leads to a 21% increase in the aggregate market value of crops in Vietnam and a 3.5% increase in aggregate welfare, with the poorest farmers gaining the most and the richest gaining the least from exchange market friction removal. A policy which redistributes land to equalize land endowments across households has small effects in aggregate, both under separability and non-separability, but the gains for the poorest are larger when consumption and production decisions are non-separable.
For more information and to register for this event, please contact William Easterly (firstname.lastname@example.org).