Essays on market conditions and household decisions : internalizing markets through farming decisions & social networks

The objective of the chapters in this thesis is to examine the behavior of farming households in rural Ethiopia where the assumption of perfect markets may be violated by the presence of high transactions costs, thin and isolated markets, and missing markets for insurance among other goods or factors. Since farming households combine both producer and consumer aspects of microeconomic analysis, constraints to consumption decisions due to market failures are (or can be) relaxed through production decisions. This forms the basis of the agricultural household model formalizing non-separability of household decisions under market failures. Using this model, the forms of these responses and their effectiveness have been examined using data on farmers’ choice of crops such as selection between food and cash crops; and composition of crop portfolio; and market participation decisions such as allocation of farm output to market exchange and household consumption; from several countries especially the developing world. These decisions are analyzed through the lens of farmers’ efforts to internalize imperfect food markets through their farming decisions. In addition to production decisions, other responses take the form of informally designed strategies such as risk-sharing and state-contingent credit arrangements between households facing missing insurance markets. We consider the use of these strategies by farmers in rural Ethiopia using rich plot level data added to information about household characteristics (including social networks) and market/community infrastructure collected in repeated rounds of survey starting from 1989 through 2009. We find that nonseparability or jointness in household decisions can be observed through farmers’ crop choices and use of farm output. The extent to the nonseparability of household decisions appears to be particularly sensitive to household characteristics such as size of food consumption and risk attitude; and market characteristics such as distance to market as well as community and market infrastructure. Informal risk-sharing arrangements through mutual support between households also exist in rural Ethiopia. It is observed that these informal insurance arrangements are highly persistent between relatives and neighbors